Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2017

Accounting Policies [Abstract]

Basis of Presentation

Basis of Presentation—The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The consolidated financial statements reflect the operations of Inotek and its wholly owned subsidiaries, Inotek Securities Corporation, Inotek Ltd and Rome Merger Sub. All significant intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to prior year amounts to conform to the current year presentation.

Segment Reporting

Segment Reporting—Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Inotek views its operations and manages its business in one operating segment.

Use of Estimates

Use of Estimates—The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from these estimates. Significant items subject to such estimates and assumptions include the valuation of stock options used for the calculation of stock-based compensation and the calculation of accruals related to research and clinical development.

Comprehensive loss

Comprehensive loss—Comprehensive loss is defined as the change in equity of a business enterprise during a period from transactions, and other events and circumstances from non-owner sources, and currently consists of net loss and changes in unrealized gains and losses on short-term investments. Accumulated other comprehensive loss consists entirely of unrealized gains and losses from short-term investments as of December 31, 2017 and 2016.

Cash and Cash Equivalents

Cash and Cash Equivalents—Cash and cash equivalents consist of bank deposits, certificates of deposit and money market accounts. Cash equivalents are carried at cost which approximates fair value due to their short-term nature and which Inotek believes do not have a material exposure to credit risk. Inotek considers all highly liquid investments with maturities of three months or less from the date of purchase to be cash equivalents.

Inotek maintains its cash and cash equivalent balances in the form of money market, savings or operating accounts with financial institutions that management believes are creditworthy. Inotek’s cash and cash equivalent accounts, at times, may exceed federally insured limits. Inotek has not experienced any losses in such accounts. Inotek believes it is not exposed to any significant credit risk on cash and cash equivalents.

Short-term investments

Short-term investments—Short-term investments consist of investments in certificates of deposit, agency bonds and United States Treasury securities. Management determines the appropriate classification of these securities at the time they are acquired and evaluates the appropriateness of such classifications at each balance sheet date. Inotek classifies its short-term investments as available-for-sale pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) 320, Investments—Debt and Equity Securities. Short-term investments are recorded at fair value, with unrealized gains and losses included as a component of accumulated other comprehensive loss in stockholders’ equity and a component of total comprehensive loss in the consolidated statements of comprehensive loss, until realized. Realized gains and losses are included in investment income on a specific-identification basis. There were no realized gains or losses on short-term investments for the twelve months ended December 31, 2017 and 2016. There were $38 of net unrealized gains and $43 of net unrealized losses on short-term investments as of December 31, 2017 and 2016, respectively.

Inotek reviews short-term investments for other-than-temporary impairment whenever the fair value of a short-term investment is less than the amortized cost and evidence indicates that a short-term investment’s carrying amount is not recoverable within a reasonable period of time. Other-than-temporary impairments of investments are recognized in the statements of operations if Inotek has experienced a credit loss, has the intent to sell the short-term investment, or if it is more likely than not that Inotek will be required to sell the short-term investment before recovery of the amortized cost basis. Evidence considered in this assessment includes reasons for the impairment, compliance with Inotek’s investment policy, the severity and the duration of the impairment and changes in value subsequent to the end of the period.

Short-term investments at December 31, 2017 consist of the following:

	Cost Basis		Unrealized Gains		Unrealized Losses			Fair Value
	(in thousands)
Current:
Certificates of deposit	$	3,667	$	—	$	—		$	3,667
United States Treasury securities		17,643		—		(16	)		17,627
	$	21,310	$	—	$	(16	)	$	21,294

Short-term investments at December 31, 2016 consist of the following:

	Cost Basis		Unrealized Gains		Unrealized Losses			Fair Value
	(in thousands)
Current:
Certificates of deposit	$	22,046	$	—	$	—		$	22,046
Agency bonds		5,917		—		(4	)		5,913
United States Treasury securities		68,766		1		(51	)		68,716
	$	96,729	$	1	$	(55	)	$	96,675

At December 31, 2017 and 2016, all short-term investments held by Inotek had contractual maturities of less than one year. Inotek evaluated its securities for other-than-temporary impairment and determined that no such impairment existed at December 31, 2017 and 2016.

Property and Equipment

Property and Equipment—Property and equipment are stated at cost. Expenditures for repairs and maintenance are charged to expense as incurred. Upon retirement or sale, the cost of the assets disposed of and the related accumulated depreciation are eliminated from the accounts and any resulting gain or loss is reflected in the consolidated statement of operations. Depreciation and amortization is provided using the straight-line method over the estimated useful lives of the assets, which are as follows:

Asset Classification	Estimated Useful Life
Computer hardware and software	3 - 5 years
Laboratory equipment	5 years
Office equipment	5 years
Leasehold improvements	Shorter of useful life or remaining life of lease

Impairment of Long-Lived Assets

Impairment of Long-Lived Assets—Inotek assesses the recoverability of its long-lived assets, which include property and equipment, whenever significant events or changes in circumstances indicate impairment may have occurred. If indicators of impairment exist, projected future undiscounted cash flows associated with the asset are compared to its carrying amount to determine whether the asset’s value is recoverable. Any resulting impairment is recorded as a reduction in the carrying value of the related asset in excess of fair value and charged to operating results (See Note 3).

Debt Issuance Costs

Debt Issuance Costs—Debt issuance costs at December 31, 2017 and 2016 consist of underwriting discounts and offering-related costs incurred by Inotek in connection with the closing of the 2021 Convertible Notes and are included as a direct deduction from the carrying amount of the 2021 Convertible Notes on Inotek’s consolidated balance sheets. Inotek amortizes debt issuance costs to interest expense over the life of the 2021 Convertible Notes using the effective interest method. (See Note 5). Amortization of debt issuance costs was $581 and $222 for the twelve months ended December 31, 2017 and 2016, respectively.

Research and Development Costs

Research and Development Costs—Research and development costs are charged to expense as incurred and include, but are not limited to:

• employee-related expenses including salaries, benefits, travel and stock-based compensation expense for research and development personnel;

• expenses incurred under agreements with contract research organizations that conduct clinical and preclinical studies, contract manufacturing organizations and consultants;

• costs associated with preclinical and development activities; and

• costs associated with regulatory operations.

Costs for certain development activities, such as clinical studies, are recognized based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical site activations, and information provided to Inotek by its vendors on their actual costs incurred. Payments for these activities are based on the terms of the individual arrangements, which may differ from the patterns of costs incurred, and are reflected in the financial statements as accrued expenses, or prepaid expenses and other current assets, if the related services have not been provided.

Stock-Based Compensation

Stock-Based Compensation —Inotek measures the cost of employee services received in exchange for an award of equity instruments based on the fair value of the award on the grant date. That cost is recognized on a straight-line basis over the period during which the employee is required to provide service in exchange for the award. The fair value of options on the date of grant is calculated using the Black-Scholes option pricing model based on key assumptions such as stock price, expected volatility and expected term. Inotek’s estimates of these assumptions are primarily based on the trading price of Inotek’s stock, historical data, peer company data and judgment regarding future trends and factors. The fair value of restricted stock awards is based on the intrinsic value of such awards on the date of grant. Compensation cost for stock purchase rights under the employee stock purchase plan is measured and recognized on the date Inotek becomes obligated to issue shares of our common stock and is based on the difference between the fair value of Inotek’s common stock and the purchase price on such date.

Fair Value Measurements

Fair Value Measurements—Inotek is required to disclose information on all assets and liabilities reported at fair value that enables an assessment of the inputs used in determining the reported fair values. FASB ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), establishes a hierarchy of inputs used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of Inotek. Unobservable inputs are inputs that reflect Inotek’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. The fair value hierarchy applies only to the valuation inputs used in determining the reported fair value of the investments and is not a measure of the investment credit quality. The three levels of the fair value hierarchy are described below:

Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that Inotek has the ability to access at the measurement date.

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

Level 3—Valuations that require inputs that reflect Inotek’s own assumptions that are both significant to the fair value measurement and unobservable.

To the extent that 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 Inotek 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.

Inotek’s material financial instruments at December 31, 2017 and 2016, consisted of cash and cash equivalents, short-term investments, accounts payable and the 2021 Notes. The fair value of Inotek’s cash and cash equivalents and accounts payable approximate their respective carrying values due to the short-term nature of these instruments and amounts. Inotek estimates the fair value of the 2021 Notes using quoted market prices obtained from third-party pricing services, which is classified as a Level 2 input due to limited market trading. As of December 31, 2017 and 2016, the fair value of the 2021 Notes was approximately $38,610 and $55,640, respectively, which differed from the 2021 Notes’ carrying value at each such date. Inotek’s assets and liabilities measured at fair value on a recurring basis include its short-term investments. There were no material liability-classified warrants, derivatives or derivative liabilities outstanding in 2017 or 2016.

Income taxes

Income taxes—Inotek uses the asset and liability method for accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases. Deferred tax assets and liabilities are measured using enacted rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is recorded if it is more likely than not that a deferred tax asset will not be realized. Inotek has provided a full valuation allowance on its deferred tax assets.

Inotek recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the consolidated financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.

Inotek recognizes interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2017 and 2016, Inotek had no accrued interest or penalties related to uncertain tax positions and no amounts have been recognized in Inotek’s statements of operations.

Net loss per share

Net loss per share—Inotek calculates net loss per share in accordance with FASB ASC 260, Earnings per Share. Basic earnings (loss) per share (“EPS”) is calculated by dividing the net income or loss applicable to common stockholders by the weighted average number of common shares outstanding for the period, without consideration of unissued common stock equivalents. The net loss applicable to common stockholders is determined by the reported net loss for the period and deducting dividends accrued and accretion of preferred stock. Diluted EPS is calculated by adjusting the weighted average common shares outstanding for the dilutive effect of common stock options, warrants, and convertible preferred stock and accrued but unpaid convertible preferred stock dividends. In periods where a net loss is recorded, no effect is given to potentially dilutive securities, as their effect would be anti-dilutive.

The following table sets forth the computation of basic and diluted EPS attributable to Inotek’s common stockholders:

	For the Years Ended December 31,
	2017			2016
	(in thousands, except share and per share amounts)
Numerator:
Net loss applicable to common stockholders	$	(29,497	)	$	(42,854	)
Denominator:
Weighted average common shares outstanding—basic    and diluted		6,765,451			6,683,794
Net loss per share applicable to common    stockholders—basic and diluted	$	(4.36	)	$	(6.41	)

The following common stock equivalents were excluded from the calculation of diluted net loss per share for the periods indicated as including them would have an anti-dilutive effect:

	For the Years Ended December 31,
	2017		2016
Shares issuable upon conversion of the 2021    Convertible Notes		1,620,947		1,620,947
Warrants for common stock		14,102		14,102
Stock options		523,520		668,864
Restricted Stock Units		271,719		117,500
Total		2,430,288		2,421,413

Subsequent Events

Subsequent Events—Inotek considers events or transactions that occur after the balance sheet date but prior to the issuance of the financial statements to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. Inotek has completed an evaluation of all subsequent events through the date the financial statements were issued. See Note 12.

Recent Accounting Pronouncements

Recent Accounting Pronouncements—In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers. The standard, including subsequently issued amendments, will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. The standard will require an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The standard will be effective for annual and interim periods beginning after December 15, 2017. Inotek does not currently generate revenue or have any arrangements that are subject to this guidance.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes the current leasing guidance and upon adoption, will require lessees to recognize right-of-use assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. The new standard is effective for Inotek for the annual period beginning after December 15, 2018, and can be early adopted by applying a modified retrospective approach for leases existing at, and entered into after, the beginning of the earliest comparable period presented in the financial statements. Inotek is currently evaluating the impact of this accounting standard update on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends FASB ASC Topic 718, Compensation – Stock Compensation (“ASC 718”), and includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. The new standard is effective for Inotek for the annual period beginning after December 15, 2016, and for annual and interim periods thereafter, with early adoption permitted. Inotek adopted this standard on January 1, 2017. The update revises requirements in the following areas: minimum statutory withholding, accounting for income taxes, and forfeitures. Prior to adoption, Inotek applied a 0% forfeiture rate to share-based compensation, resulting in no cumulative effect adjustment to the opening period. Upon adoption of ASU 2016-09, Inotek’s accounting policy is to recognize forfeitures as they occur. The update also requires Inotek to recognize the income tax effect of awards in the income statement when the awards vest or are settled. Finally, the update allows Inotek to repurchase more of an employee’s shares than it can today for tax withholding purposes without triggering a liability. The income tax related items had no effect on the current period presentation and Inotek maintains a full valuation allowance against its deferred tax assets.

In May 2017, the FASB issued ASU 2017-09, Scope of Modification Accounting, which clarifies the scope under which modification accounting should be applied to a share-based payment award under ASC 718. The standard will be effective for annual reporting periods and interim periods within those annual periods, beginning after December 15, 2017, and early adoption is permitted for interim or annual period beginning after January 1, 2017. Inotek is currently evaluating the impact of this accounting standard update on its consolidated financial statements.