Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 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 001-36193

 

Trevena, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware
(State or Other Jurisdiction of Incorporation or Organization)

26-1469215
(I.R.S. Employer Identification No.)

 

 

955 Chesterbrook Boulevard, Suite 110
Chesterbrook, PA
(Address of Principal Executive Offices)

19087
(Zip Code)

 

Registrant’s telephone number, including area code: (610) 354-8840

 

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

 

 

 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.001 par value

TRVN

The Nasdaq Stock Market LLC

 

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, or 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 

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.

 

 

 

Common Stock, $0.001 par value

Shares outstanding as of November 1, 2019: 92,593,239

 

 

Table of Contents

TABLE OF CONTENTS

 

 

 

 

 

Page

Cautionary Note Regarding Forward-Looking Statements 

iii

 

 

 

 

PART I- FINANCIAL INFORMATION

 

Item 1. 

Financial Statements (Unaudited)

1

 

Balance Sheets

1

 

Statements of Operations and Comprehensive Loss

2

 

Statement of Stockholders’ Equity

3

 

Statements of Cash Flows

4

 

Notes to Unaudited Financial Statements

5

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

30

Item 4. 

Controls and Procedures

30

 

PART II- OTHER INFORMATION

 

Item 1. 

Legal Proceedings

31

Item 1A. 

Risk Factors

31

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

64

Item 3. 

Defaults Upon Senior Securities

64

Item 4. 

Mine Safety Disclosures

64

Item 5. 

Other Information

64

Item 6. 

Exhibits

64

 

 

 

SIGNATURES 

65

 

 

 

ii

 

Table of Contents

Cautionary Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10‑Q, or this “Quarterly Report,” contains forward-looking statements that involve substantial risks and uncertainties. The forward-looking statements are contained principally in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” but also are contained elsewhere in this Quarterly Report, as well as in sections such as “Risk Factors” that are incorporated by reference into this Quarterly Report from our most recent Annual Report on Form 10‑K, or the “Annual Report.” In some cases, you can identify forward-looking statements by the words “may,” “might,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “objective,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue” and “ongoing,” or the negative of these terms, or other comparable terminology intended to identify statements about the future. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking statement contained in this Quarterly Report, we caution you that these statements are based on a combination of facts and factors currently known by us and our expectations of the future, about which we cannot be certain. Forward-looking statements include statements about:

 

·

any ongoing or planned clinical trials and preclinical studies for our product candidates;

 

·

the extent of future clinical trials potentially required by the FDA for our product candidates;

 

·

our ability to fund future operating expenses and capital expenditures with our current cash resources or to secure additional funding in the future;

 

·

the timing and likelihood of obtaining and maintaining regulatory approvals for our product candidates;

 

·

our plans to develop and potentially commercialize our product candidates;

 

·

the clinical utility and market acceptance of our product candidates, particularly in light of existing and future competition;

 

·

our sales, marketing, and manufacturing capabilities and strategies;

 

·

our intellectual property position;

 

·

ongoing litigation; and

 

·

our ability to identify additional product candidates with significant commercial potential that are consistent with our commercial objectives.

 

You should refer to the “Risk Factors” section of this Quarterly Report and our Annual Report for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Quarterly Report will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

 

 

iii

 

Table of Contents

PART I

ITEM 1. FINANCIAL STATEMENTS

TREVENA, INC.

Balance Sheets

(in thousands, except share and per share data)

 

 

 

 

 

 

 

 

    

September 30, 2019

    

December 31, 2018

 

 

 

(unaudited)

 

 

 

Assets

 

 

  

 

 

  

Current assets:

 

 

  

 

 

  

Cash and cash equivalents

 

$

29,255

 

$

32,892

Marketable securities

 

 

15,461

 

 

28,590

Prepaid expenses and other current assets

 

 

2,329

 

 

607

Total current assets

 

 

47,045

 

 

62,089

Restricted cash

 

 

1,308

 

 

1,303

Property and equipment, net

 

 

2,848

 

 

3,387

Right-of-use lease asset

 

 

5,552

 

 

 —

Other assets

 

 

18

 

 

 —

Total assets

 

$

56,771

 

$

66,779

Liabilities and stockholders’ equity

 

 

  

 

 

  

Current liabilities:

 

 

  

 

 

  

Accounts payable

 

$

3,075

 

$

1,416

Accrued expenses and other current liabilities

 

 

2,380

 

 

3,295

Current portion of loans payable, net

 

 

8,158

 

 

12,562

Lease liability

 

 

600

 

 

10

Deferred rent

 

 

 —

 

 

207

Total current liabilities

 

 

14,213

 

 

17,490

Loans payable, net

 

 

 —

 

 

4,811

Leases, net of current portion

 

 

7,968

 

 

20

Deferred rent, net of current portion

 

 

 —

 

 

2,931

Warrant liability

 

 

 6

 

 

 1

Total liabilities

 

 

22,187

 

 

25,253

Commitments and contingencies (Note 6)

 

 

  

 

 

  

Stockholders’ equity:

 

 

  

 

 

  

Common stock—$0.001 par value; 200,000,000 shares authorized; 92,581,496 and 82,323,413 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively

 

 

92

 

 

82

Preferred stock—$0.001 par value; 5,000,000 shares authorized, none issued or outstanding at September 30, 2019 and December 31, 2018

 

 

 —

 

 

 —

Additional paid-in capital

 

 

441,187

 

 

429,727

Accumulated deficit

 

 

(406,700)

 

 

(388,274)

Accumulated other comprehensive loss

 

 

 5

 

 

(9)

Total stockholders’ equity

 

 

34,584

 

 

41,526

Total liabilities and stockholders’ equity

 

$

56,771

 

$

66,779

 

See accompanying notes to financial statements.

1

Table of Contents

TREVENA, INC.

Statements of Operations and Comprehensive Loss (Unaudited)

(in thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 

 

September 30, 

 

    

2019

    

2018

    

2019

    

2018

Revenue:

 

 

  

 

 

  

 

 

  

 

 

  

License revenue

 

$

 —

 

$

3,000

 

$

 —

 

$

5,500

Operating expenses:

 

 

  

 

 

  

 

 

  

 

 

  

General and administrative

 

 

3,201

 

 

3,908

 

 

9,572

 

 

14,906

Research and development

 

 

5,554

 

 

3,350

 

 

10,430

 

 

13,076

Restructuring charges

 

 

 —

 

 

 —

 

 

 —

 

 

64

Impairment of property and equipment

 

 

 —

 

 

 —

 

 

108

 

 

 —

Total operating expenses

 

 

8,755

 

 

7,258

 

 

20,110

 

 

28,046

Loss from operations

 

 

(8,755)

 

 

(4,258)

 

 

(20,110)

 

 

(22,546)

Other income (expense):

 

 

  

 

 

  

 

 

  

 

 

  

Change in fair value of warrant liability

 

 

 1

 

 

(7)

 

 

(5)

 

 

(3)

Net gain on asset disposals

 

 

 —

 

 

32

 

 

 —

 

 

148

Other income, net

 

 

279

 

 

 —

 

 

2,152

 

 

1,428

Interest income

 

 

109

 

 

268

 

 

360

 

 

693

Interest expense

 

 

(190)

 

 

(515)

 

 

(814)

 

 

(1,790)

Gain (loss) on foreign currency exchange

 

 

(10)

 

 

(3)

 

 

(9)

 

 

 7

Total other income (expense)

 

 

189

 

 

(225)

 

 

1,684

 

 

483

Loss before income tax expense

 

 

(8,566)

 

 

(4,483)

 

 

(18,426)

 

 

(22,063)

Foreign income tax expense

 

 

 —

 

 

 —

 

 

 —

 

 

(745)

Net loss attributable to common stockholders

 

$

(8,566)

 

$

(4,483)

 

$

(18,426)

 

$

(22,808)

Other comprehensive gain (loss), net:

 

 

  

 

 

  

 

 

  

 

 

  

Unrealized gain (loss) on marketable securities

 

 

(5)

 

 

 —

 

 

14

 

 

22

Other comprehensive gain (loss), net

 

 

(5)

 

 

 —

 

 

14

 

 

22

Comprehensive loss

 

$

(8,571)

 

$

(4,483)

 

$

(18,412)

 

$

(22,786)

Per share information:

 

 

  

 

 

  

 

 

  

 

 

  

Net loss per share of common stock, basic and diluted

 

$

(0.09)

 

$

(0.06)

 

$

(0.20)

 

$

(0.32)

Weighted average common shares outstanding, basic and diluted

 

 

92,569,993

 

 

77,445,675

 

 

91,307,429

 

 

70,604,827

 

See accompanying notes to financial statements.

2

Table of Contents

TREVENA, INC.

Statement of Stockholders’ Equity (Unaudited)
(in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

Common Stock

 

 

 

 

 

 

 

Other

 

 

 

 

 

Number

 

$0.001

 

Additional

 

 

 

 

Comprehensive

 

Total

 

 

of

 

Par

 

Paid-in

 

Accumulated

 

Income

 

Stockholders'

 

    

Shares

    

Value

    

Capital

    

Deficit

    

(Loss)

  

Equity

Balance, January 1, 2019

 

82,323,413

 

$

82

 

$

429,727

 

$

(388,274)

 

$

(9)

 

$

41,526

Stock-based compensation expense

 

 —

 

 

 —

 

 

754

 

 

 —

 

 

 —

 

 

754

Exercise of stock options

 

30,225

 

 

 —

 

 

21

 

 

 —

 

 

 —

 

 

21

Issuance of warrants to underwriters in connection with equity offering

 

 —

 

 

 —

 

 

347

 

 

 —

 

 

 —

 

 

347

Issuance of common stock, net of issuance costs

 

10,000,000

 

 

10

 

 

8,886

 

 

 —

 

 

 —

 

 

8,896

Unrealized gain on marketable securities

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

12

 

 

12

Net loss

 

 —

 

 

 —

 

 

 —

 

 

(5,169)

 

 

 —

 

 

(5,169)

Balance, March 31, 2019

 

92,353,638

 

$

92

 

$

439,735

 

$

(393,443)

 

$

 3

 

$

46,387

Stock-based compensation expense

 

 —

 

 

 —

 

 

793

 

 

 —

 

 

 —

 

 

793

Shares repurchased by the Company

 

(122)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes

 

213,679

 

 

 —

 

 

(104)

 

 

 —

 

 

 —

 

 

(104)

Unrealized gain on marketable securities

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 7

 

 

 7

Net loss

 

 —

 

 

 —

 

 

 —

 

 

(4,691)

 

 

 —

 

 

(4,691)

Balance, June 30, 2019

 

92,567,195

 

$

92

 

$

440,424

 

$

(398,134)

 

$

10

 

$

42,392

Stock-based compensation expense

 

 

 

 

 —

 

 

768

 

 

 —

 

 

 —

 

 

768

Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes

 

14,301

 

 

 —

 

 

(5)

 

 

 —

 

 

 —

 

 

(5)

Unrealized gain on marketable securities

 

 

 

 

 —

 

 

 —

 

 

 —

 

 

(5)

 

 

(5)

Net loss

 

 

 

 

 —

 

 

 —

 

 

(8,566)

 

 

 —

 

 

(8,566)

Balance, September 30, 2019

 

92,581,496

 

$

92

 

$

441,187

 

$

(406,700)

 

$

 5

 

$

34,584

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

Common Stock

 

 

 

 

 

 

 

Other

 

 

 

 

 

Number

 

$0.001

 

Additional

 

 

 

 

Comprehensive

 

Total

 

 

of

 

Par

 

Paid-in

 

Accumulated

 

Income

 

Stockholders'

 

    

Shares

    

Value

    

Capital

    

Deficit

    

(Loss)

  

Equity

Balance, January 1, 2018

 

62,310,795

 

$

62

 

$

392,103

 

$

(357,490)

 

$

(42)

 

$

34,633

Stock-based compensation expense

 

 —

 

 

 —

 

 

1,498

 

 

 —

 

 

 —

 

 

1,498

Exercise of stock options

 

88,048

 

 

 —

 

 

57

 

 

 —

 

 

 —

 

 

57

Issuance of common stock, net of issuance costs

 

5,204,893

 

 

 6

 

 

9,148

 

 

 —

 

 

 —

 

 

9,154

Unrealized gain on marketable securities

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(4)

 

 

(4)

Net loss

 

 —

 

 

 —

 

 

 —

 

 

(9,021)

 

 

 —

 

 

(9,021)

Balance, March 31, 2018

 

67,603,736

 

$

68

 

$

402,806

 

$

(366,511)

 

$

(46)

 

$

36,317

Stock-based compensation expense

 

 —

 

 

 —

 

 

1,287

 

 

 —

 

 

 —

 

 

1,287

Exercise of stock options

 

44,904

 

 

 —

 

 

26

 

 

 —

 

 

 —

 

 

26

Issuance of common stock, net of issuance costs

 

5,859,345

 

 

 6

 

 

10,338

 

 

 —

 

 

 —

 

 

10,344

Unrealized gain on marketable securities

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

26

 

 

26

Net loss

 

 —

 

 

 —

 

 

 —

 

 

(9,304)

 

 

 —

 

 

(9,304)

Balance, June 30, 2018

 

73,507,985

 

$

74

 

$

414,457

 

$

(375,815)

 

$

(20)

 

$

38,696

Stock-based compensation expense

 

 —

 

 

 —

 

 

734

 

 

 —

 

 

 —

 

 

734

Issuance of common stock, net of issuance costs

 

8,815,306

 

 

 8

 

 

13,689

 

 

 —

 

 

 —

 

 

13,697

Net loss

 

 —

 

 

 —

 

 

 —

 

 

(4,483)

 

 

 —

 

 

(4,483)

Balance, September 30, 2018

 

82,323,291

 

$

82

 

$

428,880

 

$

(380,298)

 

$

(20)

 

$

48,644

 

See accompanying notes to financial statements.

3

Table of Contents

TREVENA, INC.

Statements of Cash Flows (Unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 30, 

 

    

2019

    

2018

Operating activities:

 

 

 

 

 

 

Net loss

 

$

(18,426)

 

$

(22,808)

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

 

 

  

 

 

 

Depreciation and amortization

 

 

431

 

 

496

Stock-based compensation

 

 

2,315

 

 

3,519

Noncash interest expense on loans

 

 

285

 

 

626

Impairment of property and equipment

 

 

108

 

 

 —

Loss on disposal of assets

 

 

 —

 

 

124

Revaluation of warrant liability

 

 

 5

 

 

 3

Accretion of bond discount on marketable securities

 

 

(442)

 

 

(88)

Changes in operating assets and liabilities:

 

 

 

 

 

 

Prepaid expenses and other assets

 

 

(1,766)

 

 

197

Operating lease right-of-use assets and operating lease liabilities

 

 

(118)

 

 

 —

Accounts payable, accrued expenses and other liabilities

 

 

746

 

 

(1,744)

Net cash used in operating activities

 

 

(16,862)

 

 

(19,675)

Investing activities:

 

 

  

 

 

  

Purchases of property and equipment

 

 

 —

 

 

(379)

Maturities of marketable securities

 

 

67,390

 

 

50,284

Purchases of marketable securities

 

 

(53,805)

 

 

(46,330)

Net cash provided by investing activities

 

 

13,585

 

 

3,575

Financing activities:

 

 

  

 

 

  

Proceeds from exercise of common stock options

 

 

21

 

 

83

Proceeds from issuance of common stock, net

 

 

9,243

 

 

33,195

Payment of employee withholding taxes on vested restricted stock units

 

 

(109)

 

 

 —

Capital lease payments

 

 

(10)

 

 

(8)

Repayments of loans payable, net

 

 

(9,500)

 

 

(9,500)

Net cash (used in) provided by financing activities

 

 

(355)

 

 

23,770

Net (decrease) increase in cash, cash equivalents and restricted cash

 

 

(3,632)

 

 

7,670

Cash, cash equivalents and restricted cash—beginning of period

 

 

34,195

 

 

17,970

Cash, cash equivalents and restricted cash—end of period

 

$

30,563

 

$

25,640

Supplemental disclosure of cash flow information:

 

 

  

 

 

  

Cash paid for interest

 

$

529

 

$

1,161

Fair value of common stock warrants issued to underwriters

 

$

347

 

$

 —

 

See accompanying notes to financial statements.

4

Table of Contents

TREVENA, INC.

Notes to Unaudited Financial Statements

September 30, 2019

1. Organization and Description of the Business

Trevena, Inc., or the Company, was incorporated in Delaware as Parallax Therapeutics, Inc. on November 9, 2007. The Company began operations in December 2007, and its name was changed to Trevena, Inc. on January 3, 2008. The Company is a biopharmaceutical company focused on the development and commercialization of novel medicines for patients affected by central nervous system, or CNS, disorders. The Company operates in one segment and has its principal office in Chesterbrook, Pennsylvania.

 

Since commencing operations in 2007, the Company has devoted substantially all of its financial resources and efforts to research and development, including nonclinical studies and clinical trials. The Company has never been profitable and has not yet commenced commercial operations. In November 2018, the U.S. Food and Drug Administration, or FDA, issued a complete response letter, or CRL, with respect to the Company’s new drug application, or NDA, for oliceridine. In the CRL, the FDA requested additional clinical data on the QT interval and indicated that the submitted safety database was not of adequate size for the proposed labeling. The FDA also requested certain additional nonclinical data and validation reports. In January 2019, the Company announced the receipt of the official Type A meeting minutes from the FDA regarding the CRL wherein it agreed that the current oliceridine safety database will support labeling at a maximum daily dose of 27 mg. The FDA also agreed that the Company can conduct a study in healthy volunteers to collect the requested QT interval data and that the study should include placebo- and positive-control arms. The Company submitted a detailed protocol and analysis plan to the FDA and received feedback from the FDA on key design elements for the study and analysis plan. The Company began the study in June 2019 and reported topline date in November 2019. To address remaining items in the CRL, the FDA indicated that the Company should include supporting nonclinical data related to the characterization of the 9662 metabolite and the remaining product validation reports when the Company resubmits the oliceridine NDA. In August 2019, the Company announced that it had completed enrollment in the healthy volunteer QT study, completed the nonclinical work to characterize the 9662 metabolite, and completed the remaining product validation reports requested by the FDA.

 

Since its inception, the Company has incurred losses and negative cash flows from operations. At September 30, 2019, the Company had an accumulated deficit of $406.7 million. The Company’s net loss was $18.4 million and $22.8 million for the nine months ended September 30, 2019 and 2018, respectively. The Company expects its cash and cash equivalents of $29.3 million and marketable securities of $15.5 million as of September 30, 2019, together with interest thereon, to be sufficient to fund its operating expenses, debt service, and capital expenditure requirements into the third quarter of 2020. The Company follows the provisions of Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 205-40, Presentation of Financial Statements—Going Concern, which requires management to assess the Company’s ability to continue as a going concern for one year after the date the financial statements are issued. The Company’s existing balance of cash, cash equivalents and marketable securities as of September 30, 2019 is not sufficient to fund operations past the third quarter of 2020.  While there is substantial doubt about the Company’s ability to continue as a going concern through the year period from the date of this filing, management’s plans to mitigate this risk include raising additional capital through equity or debt financings, or through strategic transactions. Management’s plans may also include the possible deferral of certain operating expenses unless and until additional capital is received. There can be no assurance that the Company will be successful in raising additional capital or that such capital, if available, will be on terms that are acceptable to the Company, or that the Company will be successful in deferring certain operating expenses. If the Company is unable to raise sufficient additional capital or defer sufficient operating expenses, the Company may be compelled to reduce the scope of its operations and planned capital expenditures.

Certain prior period amounts have been reclassified to conform to the current period presentation, the effect of which was not material to the Company’s interim consolidated financial statements.

 

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2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, or GAAP. Any reference in these notes to applicable guidance is meant to refer to the authoritative United States generally accepted accounting principles as found in the ASC and Accounting Standards Update, or ASU, of FASB. The Company’s functional currency is the U.S. dollar.

The financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of the Company’s balance sheets as of September 30, 2019 and December 31, 2018, its results of operations and its comprehensive loss for the three and nine months ended September 30, 2019 and 2018, its statement of stockholders’ equity for the period from January 1, 2019 to September 30, 2019 and for the period January 1, 2018 to September 30, 2018, and its statements of cash flows for the nine months ended September 30, 2019 and 2018. The information included in this Quarterly Report on Form 10‑Q should be read in conjunction with the financial statements and accompanying notes included in the Company’s most recent Annual Report on Form 10‑K for the year ended December 31, 2018. Since the date of those financial statements, there have been no changes to the Company’s significant accounting policies. The financial data and other information disclosed in these notes related to the nine months ended September 30, 2019 and 2018 are not necessarily indicative of the results to be expected for the year ending December 31, 2019, any other interim periods, or any future year or period.

Leases

The Company adopted ASU 2016‑02, Leases (Topic 842), and all applicable amendments as of January 1, 2019 using a modified retrospective approach. The Company determines if an arrangement is a lease at inception. Operating leases are included in long-term right-of-use assets and current and long-term lease liabilities on our consolidated balance sheets. Right-of-use 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 right-of-use assets and liabilities are recognized at 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 its incremental borrowing rates, which are the rates incurred to borrow on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The right-of-use assets are tested for impairment according to ASC 360. See Note 6 for details. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these immaterial leases on a straight-line basis over the lease term. 

The Company has lease agreements with lease and non-lease components, which are accounted for as a single lease component under the practical expedient provisions of the standard. Lease payments, which may include lease and non-lease components, are included in the measurement of the Company’s lease liabilities to the extent that such payments are either fixed amounts or variable amounts that depend on a rate or index as stipulated in the lease contract.    

Revenue

In accordance with FASB’s ASC 606, Revenue from Contracts with Customers, or ASC 606, the Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, it performs the following five steps:

(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

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(v)

recognize revenue when (or as) the entity satisfies a performance obligation.

The Company applies the five-step model to contracts when it determines that it is probable it will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

Amounts received prior to satisfying the revenue recognition criteria are recognized as deferred revenue in the Company’s balance sheet. Amounts expected to be recognized as revenue within the twelve months following the balance sheet date are classified as Current portion of deferred revenue. Amounts not expected to be recognized as revenue within the twelve months following the balance sheet date are classified as Deferred revenue, net of current portion.

License Revenues

The Company’s revenues have primarily been generated through licensing arrangements. The terms of these agreements typically include payment to the Company of one or more of the following: nonrefundable, up-front license fees; regulatory and commercial milestone payments; payments for manufacturing supply services; and royalties on net sales of licensed products. See Note 7.

In determining the appropriate amount of revenue to be recognized as it fulfills its obligations under each of its agreements, the Company performs the following steps:

(i)

identification of the promised goods or services in the contract;

(ii)

determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract;

(iii)

measurement of the transaction price, including the constraint on variable consideration;

(iv)

allocation of the transaction price to the performance obligations; and

(v)

recognition of revenue when (or as) the Company satisfies each performance obligation.

The Company also assesses whether there is an option in a contract to acquire additional goods or services. An option gives rise to a performance obligation only if the option provides a material right to the customer that it would not receive without entering into that contract. Factors that the Company considers in evaluating whether an option represents a material right include, but are not limited to: (i) the overall objective of the arrangement, (ii) the benefit the collaborator might obtain from the arrangement without exercising the option, (iii) the cost to exercise the option (e.g. priced at a significant and incremental discount), and (iv) the likelihood that the option will be exercised. With respect to options determined to be performance obligations, the Company recognizes revenue when those future goods or services are transferred or when the options expire.

 

The Company’s revenue arrangements may include the following:

 

Up-front License Fees: If a license is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenues from nonrefundable, up-front fees 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 non-refundable, up-front fees. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.

 

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Milestone Payments: At the inception of an agreement that includes regulatory or commercial milestone payments, the Company evaluates whether each milestone is considered probable of being achieved and estimates the amount to be included in the transaction price using the most likely amount method. 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 control of the Company or the licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. At each reporting period, the Company assesses the probability of achievement of each milestone under its current agreements.

 

Research and Development Activities: Under the Company’s current collaboration and license arrangements, if the Company is entitled to reimbursement for costs for services provided by the Company, it expects such reimbursement would be an offset to research and development expenses.

 

Royalties: If the Company is entitled to receive sales-based royalties from its collaborator, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (i) when the related sales occur, provided the reported sales are reliably measurable, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).

 

Manufacturing Supply and Research Services: Arrangements that include a promise for future supply of drug substance or drug product for either clinical development or commercial supply at the licensee’s discretion are generally considered as options. The Company assesses if these options provide a material right to the licensee and if so, they are accounted for as separate performance obligations.

 

The Company receives payments from its licensees based on schedules established in each contract. Upfront payments are recorded as deferred revenue upon receipt, and may require deferral of revenue recognition to a future period until the Company performs its obligations under these arrangements. Amounts are recorded as accounts receivable when the Company’s right to consideration is unconditional. The Company does not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the licensees and the transfer of the promised goods or services to the licensees will be one year or less.

 

Income Taxes

Income taxes are recorded in accordance with ASC Topic 740, Income Taxes, or ASC 740, which provides for deferred taxes using an asset and liability approach. The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are provided, if based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

 

The Company accounts for uncertain tax positions in accordance with the provisions of ASC 740. When uncertain tax positions exist, the Company recognizes the tax benefit of tax positions to the extent that the benefit will more likely than not be realized. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position, as well as consideration of the available facts and circumstances. To date, the Company has not taken any uncertain tax position or recorded any reserves, interest or penalties.

 

Recently Adopted Accounting Standards

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. The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Company adopted this standard beginning in our quarter ending September 30, 2019.

 

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In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which provides the option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings. This option would be available in each period in which the effect of the change in the U.S. federal corporate income tax rate in the TCJA (or a portion thereof) is recorded. This is effective for the Company beginning after December 15, 2018, with early adoption permitted. These amendments should be applied in the period of adoption or retrospectively to each period in which the effect of the change in the U.S federal corporate income tax rate in the TCJA is recognized. The adoption of this standard did not have an impact on the Company’s consolidated financial statements and related disclosures.

 

In February 2016, the FASB issued ASU 2016‑02, Leases (Topic 842), which requires lessees to record most leases on their balance sheets and disclose key information about leasing arrangements in an effort to increase transparency and comparability among organizations. The standard is effective for annual periods beginning after December 15, 2018 and interim periods within that reporting period. The Company adopted the standard on January 1, 2019 using a modified retrospective approach. The Company recognized a right-of-use asset and corresponding lease liability related to its operating leases as of the date of adoption. The Company elected to apply the package of practical expedients which allows entities not to reassess whether contracts are or contain leases, lease classification, and whether initial direct costs qualify for capitalization. The Company elected not to separate lease and non-lease components and will not apply the hindsight practical expedient. The adoption of this standard resulted in recording additional net lease assets and lease liabilities of approximately $5.7 million and $8.8 million, respectively. The standard did not materially impact our consolidated net earnings and had no impact on cash flows.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer in an amount reflecting the consideration it expects to receive in exchange for those goods or services. Additionally, in March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers, Principal versus Agent Considerations. ASU 2016-08 amends the principal versus agent guidance in ASU 2014-09 to clarify how an entity should identify the unit of accounting for the principal versus agent evaluation and how it should apply the control principal to certain types of arrangements. The effective date for both standards is January 1, 2018. The Company adopted these standards on January 1, 2018 and elected the modified retrospective transition method, meaning the cumulative effect of applying the new guidance, if any, was recognized at that date as an adjustment to the opening accumulated deficit balance. There was no impact to the Company’s financial statements upon adoption, as the Company did not have any contracts with customers as of the adoption date.

 

Recent Accounting Standards Not Yet Adopted

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. The new guidance modifies the disclosure requirements related to fair value measurements in Topic 820, Fair Value Measurement, including removing certain previous disclosure requirements, adding certain new disclosure requirements, and modifying certain other disclosure requirements. The ASU will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Company is evaluating the effect this standard will have on its financial statements and related disclosures.

 

3. Fair Value of Financial Instruments

ASC 820, Fair Value Measurement, establishes a fair value hierarchy for instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable inputs). Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability, and are developed based on the best information available in the circumstances.

ASC 820 identifies fair value as the exchange price, or 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 a basis for

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considering market participant assumptions in fair value measurements, ASC 820 establishes a three-tier fair value hierarchy that distinguishes among the following:

·

Level 1‑Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.

·

Level 2‑Valuations based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and models for which all significant inputs are observable, either directly or indirectly.

·

Level 3‑Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

Cash, Cash Equivalents and Marketable Securities

The following table presents fair value of the Company’s cash, cash equivalents, and marketable securities as of September 30, 2019 and December 31, 2018 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

    

Adjusted 

   

Unrealized

   

Unrealized

   

 

 

   

Cash and Cash

   

Restricted

   

Marketable

 

 

Cost

 

Gains

 

Losses

 

Fair Value

 

Equivalents

 

Cash

 

Securities

Cash

 

$

3,348

 

$

 —

 

$

 —

 

$

3,348

 

$

2,040

 

$

1,308

 

$

 —

Level 1 (1):

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Money market funds

 

 

15,240

 

 

 —

 

 

 —

 

 

15,240

 

 

15,240

 

 

 —

 

 

 —

U.S. treasury securities

 

 

22,432

 

 

 4

 

 

 —

 

 

22,436

 

 

11,975

 

 

 —

 

 

10,461

Subtotal

 

 

37,672

 

 

 4

 

 

 —

 

 

37,676

 

 

27,215

 

 

 —

 

 

10,461

Level 2 (2):

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

U.S. government agency securities

 

 

5,000

 

 

 —

 

 

 —

 

 

5,000

 

 

 —

 

 

 —

 

 

5,000

Total

 

$

46,020

 

$

 4

 

$

 —

 

$

46,024

 

$

29,255

 

$

1,308

 

$

15,461

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

Adjusted 

 

Unrealized

 

Unrealized

 

 

 

 

Cash and Cash

 

Restricted

 

Marketable

 

    

Cost

    

Gains

    

Losses

    

Fair Value

    

Equivalents

    

Cash

    

Securities

Cash

 

$

10,992

 

$

 —

 

$

 —

 

$

10,992

 

$

9,689

 

$

1,303

 

$

 —

Level 1 (1):

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Money market funds

 

 

23,203

 

 

 —

 

 

 —

 

 

23,203

 

 

23,203

 

 

 —

 

 

 —

U.S. treasury securities

 

 

18,938

 

 

 —

 

 

(4)

 

 

18,934

 

 

 —

 

 

 —

 

 

18,934

Subtotal

 

 

42,141

 

 

 —

 

 

(4)

 

 

42,137

 

 

23,203

 

 

 —

 

 

18,934

Level 2 (2):

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

U.S. government agency securities

 

 

9,661

 

 

 —

 

 

(5)

 

 

9,656

 

 

 —

 

 

 —

 

 

9,656

Total

 

$

62,794

 

$

 —

 

$

(9)

 

$

62,785

 

$

32,892

 

$

1,303

 

$

28,590


(1)

The fair value of Level 1 securities is estimated based on quoted prices in active markets for identical assets or liabilities.

(2)

The fair value of Level 2 securities is estimated based on observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.