10-Q 1 akba-10q_20160930.htm FORM 10-Q akba-10q_20160930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended September 30, 2016

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 001-36352

 

AKEBIA THERAPEUTICS, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Delaware

 

20-8756903

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

245 First Street, Suite 1100, Cambridge, MA

 

02142

(Address of Principal Executive Offices)

 

(Zip Code)

(617) 871-2098

(Registrant’s Telephone Number, Including Area Code)

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

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 and posted on its corporate web site if any, every Interactive Date File required to be submitted and posted 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 and post such files).    Yes      No  

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

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

 

 

 

Non-accelerated filer

 

 

Smaller reporting company

 

Indicate by check mark whether 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 practicable date.

 

Class

 

Outstanding at October 31, 2016

Common Stock, $0.00001 par value

 

38,324,472                    

 

 

 

 

 

 


NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements that are being made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, or PSLRA, with the intention of obtaining the benefits of the “safe harbor” provisions of the PSLRA. Forward-looking statements involve risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q are forward-looking statements. In some cases, you can identify forward-looking statements by words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or the negative of these words or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:

 

the projected timing of (1) our PRO2TECT and INNO2VATE clinical programs, (2) submission of a new drug application, or NDA, for vadadustat, and (3) commencement of Phase 1 clinical studies of AKB-6899;

 

the pace of enrollment for the PRO2TECT and INNO2VATE clinical programs;  

 

our plans to seek a geographic collaboration for the development and commercialization of vadadustat outside the United States;

 

our development plans with respect to vadadustat and AKB-6899;

 

the timing or likelihood of regulatory filings and approvals, including any required post-marketing testing or any labeling and other restrictions;

 

our plans to commercialize vadadustat, if it is approved;

 

the implementation of our business model and strategic plans for our business, product candidates and technology;

 

our commercialization, marketing and manufacturing capabilities and strategy;

 

our competitive position;

 

our intellectual property position;

 

developments and projections relating to our competitors and our industry;

 

our estimates regarding expenses (including those associated with the PRO2TECT and INNO2VATE clinical programs), future revenue, capital requirements and needs for additional financing; and

 

other risks and uncertainties, including those listed under Part II, Item 1A. Risk Factors.

All forward-looking statements in this Quarterly Report on Form 10-Q involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under Part II, Item 1A. Risk Factors and elsewhere in this Quarterly Report on Form 10-Q. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

This Quarterly Report on Form 10-Q also contains estimates, projections and other information concerning our industry, our business, and the markets for certain diseases, including data regarding the estimated size of those markets, and the incidence and prevalence of certain medical conditions. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained this industry, business, market and other data from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data and similar sources.

 

 

 

 


Akebia Therapeutics, Inc.

Table of Contents

 

Part I. Financial Information

  

 

 

 

 

Item 1 – Financial Statements (Unaudited)

  

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015

  

4

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2016 and 2015

  

5

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015

  

6

Notes to Condensed Consolidated Financial Statements

  

7

 

 

 

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

22

 

 

 

Item 3 – Quantitative and Qualitative Disclosures about Market Risk

  

33

 

 

 

Item 4 – Controls and Procedures

  

33

 

 

 

Part II. Other Information

  

 

 

 

 

Item 1 – Legal Proceedings

  

34

 

 

 

Item 1A – Risk Factors

  

35

 

 

 

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

  

58

 

 

 

Item 3 – Defaults upon Senior Securities

  

58

 

 

 

Item 4 – Mine Safety Disclosures

  

58

 

 

 

Item 5 – Other Information

 

58

 

 

 

Item 6 – Exhibits

  

59

 

 

 

Signatures

  

60

 

 

 


PART I—FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS.

AKEBIA THERAPEUTICS, INC.

Condensed Consolidated Balance Sheets

(Unaudited)

(in thousands, except share and per share data)  

 

 

September 30,

 

 

December 31,

 

 

2016

 

 

2015

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

65,830

 

 

$

49,778

 

Available for sale securities

 

95,492

 

 

 

88,676

 

Prepaid expenses and other current assets

 

3,825

 

 

 

2,563

 

Total current assets

 

165,147

 

 

 

141,017

 

Property and equipment, net

 

2,688

 

 

 

540

 

Deferred offering costs

 

 

 

 

102

 

Other assets

 

1,283

 

 

 

1,281

 

Total assets

$

169,118

 

 

$

142,940

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

8,524

 

 

$

2,313

 

Accrued expenses

 

17,615

 

 

 

9,555

 

Total current liabilities

 

26,139

 

 

 

11,868

 

Deferred rent

 

2,262

 

 

 

69

 

Deferred revenue

 

40,000

 

 

 

 

Other non-current liabilities

 

7

 

 

 

5

 

Total liabilities

 

68,408

 

 

 

11,942

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

Preferred stock $0.00001 par value, 25,000,000 shares authorized at September 30, 2016 and December 31, 2015; 0 shares issued and outstanding at September 30, 2016 and December 31, 2015

 

 

 

 

 

Common stock: $0.00001 par value; 175,000,000 shares authorized at September 30, 2016 and December 31, 2015; 38,253,190 and 30,662,218 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively

 

 

 

 

 

Additional paid-in capital

 

359,991

 

 

 

292,783

 

Treasury stock, at cost, 0 shares in 2016, 8,643 shares in 2015

 

 

 

 

(162

)

Accumulated other comprehensive loss

 

(7

)

 

 

(234

)

Accumulated deficit

 

(259,274

)

 

 

(161,389

)

Total stockholders' equity

 

100,710

 

 

 

130,998

 

Total liabilities and stockholders' equity

$

169,118

 

 

$

142,940

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

4


AKEBIA THERAPEUTICS, INC.

Condensed Consolidated 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,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

31,238

 

 

$

15,604

 

 

$

82,350

 

 

$

28,772

 

General and administrative

 

 

4,944

 

 

 

4,074

 

 

 

16,066

 

 

 

12,691

 

Total operating expenses

 

 

36,182

 

 

 

19,678

 

 

 

98,416

 

 

 

41,463

 

Operating loss

 

 

(36,182

)

 

 

(19,678

)

 

 

(98,416

)

 

 

(41,463

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

219

 

 

 

139

 

 

 

722

 

 

 

350

 

Other income (expense)

 

 

(345

)

 

 

64

 

 

 

(191

)

 

 

254

 

Net loss

 

$

(36,308

)

 

$

(19,475

)

 

$

(97,885

)

 

$

(40,859

)

Net loss per share applicable to common stockholders - basic and diluted

 

$

(0.96

)

 

$

(0.68

)

 

$

(2.61

)

 

$

(1.62

 

)

Weighted-average number of common shares used in net loss per share applicable to common stockholders—basic and diluted

 

 

37,897,902

 

 

 

28,784,231

 

 

 

37,528,869

 

 

 

25,175,077

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(36,308

)

 

$

(19,475

)

 

$

(97,885

)

 

$

(40,859

)

Other comprehensive income (loss) - unrealized gain (loss) on securities

 

 

(44

)

 

 

20

 

 

 

(7

)

 

 

(7

)

Comprehensive loss

 

$

(36,352

)

 

$

(19,455

)

 

$

(97,892

)

 

$

(40,866

)

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

5


AKEBIA THERAPEUTICS, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

 

 

 

Nine Months Ended

 

 

 

September 30, 2016

 

 

September 30, 2015

 

Operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(97,885

)

 

$

(40,859

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

172

 

 

 

85

 

Amortization of premium/discount on investments

 

 

399

 

 

 

418

 

Loss on disposal of property and equipment

 

 

306

 

 

 

 

Stock-based compensation

 

 

4,101

 

 

 

3,386

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

(1,263

)

 

 

224

 

Accounts payable

 

 

6,196

 

 

 

3,252

 

Accrued expense

 

 

8,017

 

 

 

4,024

 

Deferred revenue

 

 

40,000

 

 

 

 

Deferred rent

 

 

2,193

 

 

 

(25

)

Net cash used in operating activities

 

 

(37,764

)

 

 

(29,495

)

Investing activities:

 

 

 

 

 

 

 

 

Purchase of equipment

 

 

(2,614

)

 

 

(342

)

Proceeds from the maturities of available for sale securities

 

 

125,151

 

 

 

49,547

 

Purchase of available for sale securities

 

 

(132,138

)

 

 

(64,531

)

Net cash used in investing activities

 

 

(9,601

)

 

 

(15,326

)

Financing activities:

 

 

 

 

 

 

 

 

Proceeds from the issuance of common stock, net of issuance costs

 

 

63,205

 

 

 

78,579

 

Proceeds from the sale of stock under employee stock purchase plan

 

 

106

 

 

 

109

 

Proceeds from the exercise of stock options

 

 

125

 

 

 

70

 

Payments on capital lease obligations

 

 

(19

)

 

 

(5

)

Net cash provided by financing activities

 

 

63,417

 

 

 

78,753

 

Decrease in cash and cash equivalents

 

 

16,052

 

 

 

33,932

 

Cash and cash equivalents at beginning of the period

 

 

49,778

 

 

 

32,780

 

Cash and cash equivalents at end of the period

 

$

65,830

 

 

$

66,712

 

Non-cash financing activities

 

 

 

 

 

 

 

 

Unpaid follow-on offering costs

 

$

65

 

 

$

 

Assets acquired under capital lease

 

$

 

 

$

12

 

See accompanying notes to unaudited condensed consolidated financial statements

 

 

 

6


Akebia Therapeutics, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

September 30, 2016

 

1. Nature of Organization and Operations

Incorporated in Delaware in 2007, Akebia Therapeutics, Inc. (Akebia, or the Company) is a biopharmaceutical company focused on the development of novel proprietary therapeutics based on hypoxia inducible factor, or HIF, biology and the commercialization of these products for patients with serious unmet medical needs. HIF is the primary regulator of the production of red blood cells, or RBCs, in the body and a potentially novel mechanism for the treatment of anemia secondary to chronic kidney disease, or CKD. Pharmacologic modulation of the HIF pathway may also have broader therapeutic applications in acute renal failure, organ protection, ischemia-reperfusion injury, cancer, ophthalmology, and inflammatory diseases. The Company’s lead product candidate, vadadustat, is being developed as a once-daily, oral therapy for the treatment of anemia of CKD.  The Company has successfully completed Phase 2 development demonstrating that vadadustat can safely and predictably raise hemoglobin levels in patients with anemia related to CKD.  The Company has commenced its vadadustat Phase 3 program, which includes the PRO2TECT studies for non-dialysis patients with anemia secondary to CKD and INNO2VATE studies for dialysis-dependent patients.  

The Company’s operations to date have been limited to organizing and staffing the Company, business planning, raising capital, acquiring and developing its technology, identifying potential product candidates and undertaking preclinical and clinical studies. The Company has not generated any product revenue to date and may never generate any product revenue in the future. The Company’s product candidates are subject to long development cycles and the Company may be unsuccessful in its efforts to develop, obtain regulatory approval for or market its product candidates.

The Company is subject to a number of risks including, but not limited to, the need to obtain adequate additional funding, including the resources necessary to fund its recently commenced global Phase 3 development of vadadustat in non-dialysis and dialysis patients with anemia related to CKD. In December 2015, the Company began dosing patients in its Phase 3 vadadustat program in non-dialysis patients, PRO2TECT. The Company initiated its Phase 3 program of vadadustat in dialysis-dependent patients, INNO2VATE, in August 2016 and anticipates full enrollment by early 2018. The Company has engaged a clinical research organization for the PRO2TECT and INNO2VATE programs. The Company expects the cost of the Phase 3 program to be in the range of $80,000 to $85,000 per patient, and it plans to enroll approximately 3,100 patients in PRO2TECT and approximately 2,600 patients in INNO2VATE.

The Company is also subject to a number of other risks including possible failure of preclinical testing or clinical trials, the need to obtain marketing approval for its product candidates, the development of new technological innovations by competitors, the need to successfully commercialize and gain market acceptance of any of the Company’s products that are approved and uncertainty around intellectual property matters. If the Company does not successfully commercialize any of its products, it will be unable to generate product revenue or achieve profitability.

In December 2015, the Company entered into a collaboration agreement with Mitsubishi Tanabe Pharma Corporation, or MTPC, to develop and commercialize vadadustat in Japan and certain other countries in Asia for total milestone payments of up to $350.0 million, including up to $100.0 million in upfront and development payments, of which $40.0 million was received in January 2016.  If Japanese patients are not included in either the global Phase 3 PRO2TECT or INNO2VATE programs, $20.0 million of the $40.0 million received would be used to fund further local development of vadadustat in Japan or be refunded to MTPC.  In addition, the Company is also eligible to receive tiered double-digit royalty payments on sales of vadadustat.

Through the end of 2015 the Company had raised approximately $187.4 million of net proceeds from three underwritten public offerings, including our initial public offering.  In January 2016, the Company completed a follow-on public offering whereby the Company sold 7,250,000 shares of common stock at a price of $9.00 per share.  The aggregate net proceeds received by the Company from the offering were approximately $61.0 million, net of underwriting discounts and commissions and estimated offering expenses payable by the Company.

In May 2016, the Company entered into a Sales Agreement with Cantor Fitzgerald & Co. to periodically sell up to $75.0 million of shares of common stock in an at-the-market, or ATM, offering.  During the third quarter of 2016, the Company sold 239,906 shares of common stock pursuant to the Sales Agreement.  The aggregate net proceeds received by the Company were approximately $2.2 million, net of commissions.

The Company believes that its cash, cash equivalents and available for sale securities of $161.3 million as of September 30, 2016 is sufficient to fund its current operating plan through the second quarter of 2017.  There can be no assurance, however, that the current operating plan will be achieved in the timeframe anticipated by the Company, or that its cash resources will fund the Company’s

7


operating plan for the period anticipated by the Company or that additional funding will be available on terms acceptable to the Company, or at all.

 

As of September 30, 2016, the Company had cash and cash equivalents of approximately $161.3 million and current accounts payable and accrued expenses of $26.1 million. The Company has incurred substantial losses since inception, primarily due to investments in research and development, and we expect to continue to incur substantial losses over the next four to five years. Without any additional financings or other transactions, the Company anticipates that it will have sufficient cash available to support its development programs and business operations through the second quarter of 2017.

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.  In the future, the Company’s ability to continue as a going concern is dependent on its ability to raise additional capital to fund its research and development programs and meet its obligations on a timely basis.  As of September 30, 2016, the financial statements do not include any adjustments relating to recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue its existence.

 

To potentially mitigate the risk that the Company may be unable to continue as a going concern, it plans to pursue all or a combination of potential strategic alliances, collaborations and other strategic transactions.  The Company also may seek additional capital through public or private equity offerings (including its ATM offering), which could have a dilutive impact on stockholders and the issuance, or even potential issuance, of shares could have a negative effect on the market price of common stock.  Even if the Company is able to secure additional capital, such financings may only be available on unattractive terms, or could result in significant dilution of stockholders’ interests.  If none of the foregoing alternatives is available or, if available, the Company is unable to raise sufficient capital through such transactions, it may be forced to limit or cease its development activities.

 

 

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Akebia Therapeutics Securities Corporation and Akebia Europe Limited.  All intercompany balances and transactions have been eliminated in consolidation.  These condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP).  Any reference in these notes to applicable guidance is meant to refer to the authoritative U.S. GAAP as found in the Accounting Standards Codification (ASC) and Accounting Standards Update (ASU) of the Financial Accounting Standards Board (FASB).

In the quarter ended December 31, 2015, the Company identified and corrected an error in the historical classification of certain operating costs between research and development and general and administrative expenses.  The Company concluded the effect of this classification error was not material to its consolidated financial statements for any prior period.  The classification correction had no effect on the Company’s current or historical total operating expenses or net loss.

The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year. These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 2015, and the notes thereto, which are included in the Company’s Annual Report on Form 10-K (File No. 001-36352), which was filed with the Securities and Exchange Commission (SEC) on March 14, 2016.

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the FASB or other standard-setting bodies and adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes the impact of recently issued standards that are not yet effective will not have a material impact on its financial position or results of operations upon adoption.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, as part of its Simplification Initiative. The areas for simplification in this update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Some of the areas for simplification apply only to nonpublic entities. The amendments in ASU 2016-09 are effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early application is permitted for all entities. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.

8


In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes the existing guidance for lease accounting, Leases (Topic 840). ASU 2016-02 requires lessees to recognize leases on their balance sheets, and leaves lessor accounting largely unchanged. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early application is permitted for all entities. ASU 2016-02 requires a modified retrospective approach for all leases existing at, or entered into after, the date of initial application, with an option to elect to use certain transition relief. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.

In August 2014, the FASB issued ASU 2014-15, which requires management of public and private companies to evaluate whether there is substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued.  Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued.  If conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, and substantial doubt is not alleviated after consideration of management’s plans, an entity should include a statement in the footnotes indicating that there is substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued.  The new standard is effective for annual periods ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted.  While the Company intends to adopt the standard as of December 31, 2016, if this standard had been adopted as of September 30, 2016, management of the Company believes that it would have concluded there is substantial doubt about the Company’s ability to continue as a going concern one year from the date of filing of this Form 10-Q. See Note 1 for additional information on our liquidity risks and management’s plans.

In May 2014, the FASB issued a new revenue recognition standard which amends revenue recognition principles and provides a single, comprehensive set of criteria for revenue recognition within and across all industries. The new standard provides a five step framework whereby revenue is recognized when promised goods or services are transferred to a customer at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard also requires enhanced disclosures pertaining to revenue recognition in both interim and annual periods. In August 2015, the FASB deferred the effective date of the new revenue standard from January 1, 2017 to January 1, 2018. Early adoption is permitted any time after the original effective date, which for us is January 1, 2017. The standard allows for adoption using a full retrospective method or a modified retrospective method. The Company is currently evaluating the timing, method of adoption and the expected impact that the standard could have on our consolidated financial statements and related disclosures.

 

Segment Information

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. The Company views its operations and manages its business in one operating segment, which is the business of developing and commercializing proprietary therapeutics based on HIF biology.

Use of Estimates

The preparation of financial statements in conformity with U.S. 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 may differ from those estimates. Management considers many factors in selecting appropriate financial accounting policies and controls, and in developing the estimates and assumptions that are used in the preparation of these financial statements. Management must apply significant judgment in this process. In addition, other factors may affect estimates, including: expected business and operational changes, sensitivity and volatility associated with the assumptions used in developing estimates, and whether historical trends are expected to be representative of future trends. The estimation process often may yield a range of potentially reasonable estimates of the ultimate future outcomes, and management must select an amount that falls within that range of reasonable estimates. Estimates are used in the following areas, among others: prepaid and accrued research and development expense, stock-based compensation expense, accrued expenses and income taxes.

Prior to the initial public offering, the Company utilized significant estimates and assumptions in determining the fair value of its common stock. The Company granted stock options at exercise prices not less than the fair market value of its common stock as determined by the Board of Directors contemporaneously at the date such grants were made, with input from management. Prior to the Company’s initial public offering in March 2014, the fair value of common stock at the grant date was adjusted in connection with the Company’s retrospective fair value assessment for financial reporting purposes. Accordingly, the Board of Directors determined the estimated fair value of the Company’s common stock based on a number of objective and subjective factors, including external market conditions affecting the biotechnology industry sector and the prices at which the Company sold shares of preferred stock, the superior rights and preferences of securities senior to the Company’s common stock at the time and the likelihood of achieving a liquidity event, such as an initial public offering or sale of the Company.  

9


Cash and Cash Equivalents

Cash and cash equivalents consist of all cash on hand, deposits and funds invested in available-for-sale securities with original maturities of three months or less at the time of purchase. At September 30, 2016, the Company’s cash is primarily in money market funds. The Company may maintain balances with its banks in excess of federally insured limits.

Investments

Management determines the appropriate classification of securities at the time of purchase and reevaluates such designation as of each balance sheet date. Currently, the Company classifies all securities as available-for-sale which are included in current assets as they are intended to fund current operations. The Company carries available-for-sale securities at fair value. The Company conducts periodic reviews to identify and evaluate each investment that has an unrealized loss, in accordance with the meaning of other-than-temporary impairment and its application to certain investments. When assessing whether a decline in the fair value of a security is other-than-temporary, the Company considers the fair market value of the security, the duration of the security’s decline, and prospects for the underlying business.  Based on these considerations, the Company did not identify any other-than-temporary unrealized losses at September 30, 2016. Unrealized losses on available-for-sale securities that are determined to be temporary, and not related to credit loss, are recorded in accumulated other comprehensive loss, a component of stockholders’ equity. The amortized cost of debt securities in this category reflects amortization of premiums and accretion of discounts to maturity computed under the effective interest method. The Company includes this amortization in the caption “Interest income” within the consolidated statements of operations and comprehensive loss. The Company also includes in net investment income, realized gains and losses and declines in value determined to be other than temporary. The Company bases the cost of securities sold upon the specific identification method, and includes interest and dividends on securities in interest income.

Revenue Recognition

To date, the Company has not generated any revenue from the sales of products or other means.  For the foreseeable future, the Company expects substantially all of its revenues will be generated from its collaboration with MTPC (see Note 9) and any other collaborations the Company may enter into.

The Company will recognize revenue in accordance with ASC Topic 605, Revenue Recognition (ASC 605). Accordingly, revenue will be recognized for each unit of accounting when all of the following criteria are met:

 

Persuasive evidence of an arrangement exists;

 

Delivery has occurred or services have been rendered;

 

The seller’s price to the buyer is fixed or determinable; and

 

Collectability is reasonably assured.

Amounts received prior to satisfying the revenue recognition criteria are recorded as deferred revenue. Amounts expected to be recognized as revenue within the 12 months following the balance sheet date are classified in current liabilities. Amounts not expected to be recognized as revenue within the 12 months following the balance sheet date are classified as deferred revenue, net of current portion.

The Company evaluates multiple‑element arrangements based on the guidance in ASC Topic 605‑25, Revenue Recognition Multiple‑Element Arrangements (ASC 605‑25). Pursuant to the guidance in ASC 605‑25, the Company evaluates multiple‑element arrangements to determine (1) the deliverables included in the arrangement and (2) whether the individual deliverables represent separate units of accounting or whether they must be accounted for as a combined unit of accounting. This evaluation involves subjective determinations and requires the Company to make judgments about the individual deliverables and whether such deliverables are separable from the other aspects of the contractual relationship. Deliverables are considered separate units of accounting provided that the delivered item has value to the customer on a standalone basis and, if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item is considered probable and substantially in the Company’s control. In assessing whether an item has standalone value, the Company considers factors such as the research, development, manufacturing and commercialization capabilities of the collaboration partner and the availability of the associated expertise in the general marketplace. In addition, the Company considers whether the collaboration partner can use a deliverable for its intended purpose without the receipt of the remaining deliverable, whether the value of the deliverable is dependent on the undelivered item and whether there are other vendors that can provide the undelivered items. 

The consideration received under the arrangement that is fixed or determinable is then allocated among the separate units of accounting using the relative selling price method. The Company determines the estimated selling price for units of accounting within each arrangement using vendor‑specific objective evidence (VSOE) of selling price, if available, third‑party evidence (TPE) of selling price if VSOE is not available, or best estimate of selling price (BESP) if neither VSOE nor TPE is available. Determining the BESP

10


for a unit of accounting requires significant judgment. In developing the BESP for a unit of accounting, the Company considers applicable market conditions and relevant entity‑specific factors, including factors that were contemplated in negotiating the agreement with the customer and estimated costs. The Company validates the BESP for units of accounting by evaluating whether changes in the key assumptions used to determine the BESP will have a significant effect on the allocation of arrangement consideration between multiple units of accounting.

The Company will recognize arrangement consideration allocated to each unit of accounting when all of the revenue recognition criteria in ASC 605 are satisfied for that particular unit of accounting. In the event that a deliverable does not represent a separate unit of accounting, the Company will recognize revenue from the combined unit of accounting over the Company’s contractual or estimated performance period for the undelivered elements, which is typically the term of the Company’s research and development obligations. If there is no discernible pattern of performance or objectively measurable performance measures do not exist, then the Company will recognize revenue under the arrangement on a straight‑line basis over the period the Company is expected to complete its performance obligations. Conversely, if the pattern of performance in which the service is provided to the customer can be determined and objectively measurable performance measures exist, then the Company recognizes revenue under the arrangement using the proportional performance method. Revenue to be recognized is limited to the lesser of the cumulative amount of payments received or the cumulative amount of revenue earned, as determined using the straight‑line method or proportional performance method, as applicable, as of the period ending date.

At the inception of an arrangement that includes milestone payments, the Company evaluates whether each milestone is substantive and at risk to both parties on the basis of the contingent nature of the milestone. This evaluation includes an assessment of whether: (1) the consideration is commensurate with either the Company’s performance to achieve the milestone or the enhancement of the value of the delivered item(s) as a result of a specific outcome resulting from its performance to achieve the milestone, (2) the consideration relates solely to past performance and (3) the consideration is reasonable relative to all of the deliverables and payment terms within the arrangement. The Company evaluates factors such as the scientific, clinical, regulatory, commercial, and other risks that must be overcome to achieve the particular milestone and the level of effort and investment required to achieve the particular milestone in making this assessment. There is considerable judgment involved in determining whether a milestone satisfies all of the criteria required to conclude that a milestone is substantive. Milestones that are not considered substantive are recognized as earned if there are no remaining performance obligations or over the remaining period of performance, assuming all other revenue recognition criteria are met.

Options are considered substantive if, at the inception of the arrangement, the Company is at risk as to whether the collaboration partner will choose to exercise the option. Factors that the Company considers in evaluating whether an option is substantive include the cost to exercise the option, the overall objective of the arrangement, the benefit the collaborator might obtain from the arrangement without exercising the option and the likelihood the option will be exercised. When an option is considered substantive, the Company does not consider the option or item underlying the option to be a deliverable at the inception of the arrangement and the associated option fees are not included in allocable consideration, assuming the option is not priced at a significant and incremental discount. Conversely, when an option is not considered substantive, the Company would consider the option, including other deliverables contingent upon the exercise of the option, to be a deliverable at the inception of the arrangement and a corresponding amount would be included in allocable arrangement consideration. In addition, if the price of the option includes a significant incremental discount, the discount would be included as a deliverable at the inception of the arrangement.

The Company will recognize royalty revenue in the period of sale of the related product(s), based on the underlying contract terms, provided that the reported sales are reliably measurable and the Company has no remaining performance obligations, assuming all other revenue recognition criteria are met.

Patents

Costs incurred in connection with the application for and issuance of patents are expensed as incurred.

Income Taxes

Income taxes are recorded in accordance with ASC Topic 740, Income Taxes (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,

11


as well as consideration of the available facts and circumstances. As of September 30, 2016 and 2015, the Company does not have any significant uncertain tax positions. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense.

Stock-Based Compensation

The Company accounts for its stock-based compensation awards in accordance with ASC Topic 718, Compensation—Stock Compensation (ASC 718). ASC 718 requires all stock-based payments to employees, including grants of employee stock options, restricted stock, restricted stock units, or RSUs, and modifications to existing stock awards, to be recognized in the statements of operations and comprehensive loss based on their fair values. The Company accounts for stock-based awards to non-employees in accordance with ASC Topic 505-50, Equity-Based Payments to Non-Employees (ASC 505-50), which requires the fair value of the award to be re-measured at fair value until a performance commitment is reached or counterparty performance is complete. The Company’s stock-based awards are comprised of stock options, shares of restricted stock and shares of common stock. The Company estimates the fair value of options granted using the Black-Scholes option pricing model. The Company uses the quoted market price of comparable public companies to determine the fair value of restricted stock awards and common stock awards.

The Black-Scholes option pricing model requires the input of certain subjective assumptions, including (a) the expected stock price volatility, (b) the calculation of expected term of the award, (c) the risk-free interest rate and (d) expected dividends. Due to the lack of company-specific historical and implied volatility data for trading the Company’s stock in the public market, the Company has based its estimate of expected volatility on the historical volatility of a group of similar companies that are publicly traded. The historical volatility is calculated based on a period of time commensurate with the expected term assumption. The computation of expected volatility is based on the historical volatility of a representative group of companies with similar characteristics to the Company, including stage of product development and life science industry focus. The Company is in the product development stage with no revenue and the representative group of companies has certain similar characteristics to the Company. The Company believes the group selected has sufficient similar economic and industry characteristics, and includes companies that are most representative of the Company.  The Company uses the simplified method as prescribed by the SEC Staff Accounting Bulletin No. 107, Share-Based Payment, to calculate the expected term for options granted to employees as it does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term. The expected term is applied to the stock option grant group as a whole, as the Company does not expect substantially different exercise or post-vesting termination behavior among its employee population. For options granted to non-employees, the Company utilizes the contractual term of the arrangement as the basis for the expected term assumption. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of the stock options. The expected dividend yield is assumed to be zero as the Company has never paid dividends and has no current plans to pay any dividends on its common stock, which is similar to the Company’s peer group.

The Company’s stock-based awards are subject to either service- or performance-based vesting conditions. Compensation expense related to awards to employees with service-based vesting conditions is recognized on a straight-line basis based on the grant date fair value over the associated service period of the award, which is generally the vesting term. Consistent with the guidance in ASC 505- 50, compensation expense related to awards to non-employees with service-based vesting conditions is recognized on a straight-line basis based on the then-current fair value at each financial reporting date prior to the measurement date over the associated service period of the award, which is generally the vesting term. Compensation expense related to awards to employees with performance-based vesting conditions is recognized based on the grant date fair value over the requisite service period using the accelerated attribution method to the extent achievement of the performance condition is probable. Consistent with the guidance in ASC 505-50, compensation expense related to awards to non-employees with performance-based vesting conditions is recognized based on the then-current fair value at each financial reporting date prior to the measurement date over the requisite service period using the accelerated attribution method to the extent achievement of the performance condition is probable.

The Company is also required to estimate forfeitures at the time of grant, and revise those estimates in the subsequent periods if actual forfeitures differ from its estimates. The Company uses historical data to estimate pre-vesting forfeitures and record stock-based compensation expense only for those awards that are expected to vest. To the extent that actual forfeitures differ from the Company’s estimates, the difference is recorded as a cumulative adjustment in the period the estimates were revised. Stock-based compensation expense recognized in the condensed consolidated financial statements is based on awards that are ultimately expected to vest.

Fair Value of Financial Instruments

The Company 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. ASC Topic 820, Fair Value Measurements and Disclosures (ASC 820), establishes a hierarchy of inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the observable inputs be 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 the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that

12


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 the Company 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 the Company’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 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.

Items measured at fair value on a recurring basis include short-term investments (see Note 4). The carrying amounts of prepaid expenses and other current assets, accounts payable and accrued expenses approximate their fair values due to their short-term maturities. The rate implicit within the Company’s capital lease obligation approximates market interest rates.

Concentrations of Credit Risk and Off-Balance Sheet Risk

Cash and investments are the only financial instruments that potentially subject the Company to concentrations of credit risk. The Company maintains its cash with high quality, accredited financial institutions and, accordingly, such funds are subject to minimal credit risk. The Company has no significant off-balance sheet concentrations of credit risk, such as foreign currency exchange contracts, option contracts or other hedging arrangements.

Net Loss per Share

Basic net loss per share is calculated by dividing net loss attributable to common stockholders by the weighted-average shares outstanding during the period, without consideration for common stock equivalents. Diluted net loss per share is calculated by adjusting weighted-average shares outstanding for the dilutive effect of common stock equivalents outstanding for the period, determined using the treasury-stock method. For purposes of the diluted net loss per share calculation, preferred stock, stock options, unvested restricted stock and RSUs are considered to be common stock equivalents, but have been excluded from the calculation of diluted net loss per share, as their effect would be anti-dilutive for all periods presented. Therefore, basic and diluted net loss per share were the same for all periods presented.

Property and Equipment

Property and equipment is stated at cost, less accumulated depreciation. Assets under capital lease are included in property and equipment. Property and equipment is depreciated using the straight-line method over the estimated useful lives of the assets, generally three to seven years. Such costs are periodically reviewed for recoverability when impairment indicators are present. Such indicators include, among other factors, operating losses, unused capacity, market value declines and technological obsolescence. Recorded values of asset groups of equipment that are not expected to be recovered through undiscounted future net cash flows are written down to current fair value, which generally is determined from estimated discounted future net cash flows (assets held for use) or net realizable value (assets held for sale).

13


The following is the summary of property and equipment and related accumulated depreciation as of September 30, 2016 and December 31, 2015.

 

 

 

Useful Life

 

September 30, 2016

 

 

December 31, 2015

 

 

 

 

 

(in thousands)

 

Computer equipment and software

 

3

 

$

466

 

 

$

300

 

Furniture and fixtures

 

5

 

 

724

 

 

 

243

 

Equipment

 

7

 

 

50

 

 

 

50

 

Leasehold improvements

 

Shorter of the

useful life or

remaining

lease term

(10 years)

 

 

1,730

 

 

 

70

 

Office equipment under capital lease

 

3

 

 

36

 

 

 

24

 

 

 

 

 

 

3,006

 

 

 

687

 

Less accumulated depreciation

 

 

 

 

(318

)

 

 

(147

)

Net property and equipment

 

 

 

$

2,688

 

 

$

540

 

 

Depreciation expense, including expense associated with assets under capital leases, was approximately $93,000 and $35,000 for the three months ended September 30, 2016 and 2015, respectively and $171,000 and $85,000 for the nine months ended September 30, 2016 and 2015, respectively.  

 

 

3. Available for sale securities

Available for sale securities at September 30, 2016 and December 31, 2015 consist of the following:

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

 

 

 

 

Unrealized

 

 

Unrealized

 

 

 

 

 

 

 

Amortized Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

 

 

(in thousands)

 

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

65,830

 

 

$

 

 

$

 

 

$

65,830

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

17,575

 

 

 

 

 

 

$

17,575

 

U.S. Government debt securities

 

 

71,968

 

 

 

12

 

 

 

(14

)

 

 

71,966

 

Corporate debt securities

 

 

5,956

 

 

 

 

 

(5

)

 

 

5,951

 

Total available for sale securities

 

$

95,499

 

 

$

12

 

 

$

(19

)

 

$

95,492

 

Total cash, cash equivalents, and available for sale securities

 

$

161,329

 

 

$

12

 

 

$

(19

)

 

$

161,322

 

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

 

 

 

 

Unrealized

 

 

Unrealized

 

 

 

 

 

 

 

Amortized Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

 

 

(in thousands)

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

49,778

 

 

$

 

 

$

 

 

$

49,778

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

21,505

 

 

 

 

 

 

 

$

21,505

 

U.S. Government debt securities

 

 

46,461

 

 

 

 

 

(185

)

 

 

46,276

 

Corporate debt securities

 

 

20,944

 

 

 

1

 

 

 

(50

)

 

 

20,895

 

Total available for sale securities

 

$

88,910

 

 

$

1

 

 

$

(235

)

 

$

88,676

 

Total cash, cash equivalents, and available for sale securities

 

$

138,688

 

 

$

1

 

 

$

(235

)

 

$

138,454

 

14


 

The estimated fair value of the Company’s available for sale securities balance at September 30, 2016, by contractual maturity, is as follows:

 

Due in one year or less

 

$

78,818

 

Due after one year

 

 

16,674

 

Total available for sale securities

 

$

95,492

 

 

 

 

 

4. Fair Value of Financial Instruments

The Company utilizes a portfolio management company for the valuation of the majority of its investments. This company is an independent, third-party vendor recognized to be an industry leader with access to market information that obtains or computes fair market values from quoted market prices, pricing for similar securities, recently executed transactions, cash flow models with yield curves and other pricing models. For valuations obtained from the pricing service, the Company performs due diligence to understand how the valuation was calculated or derived, focusing on the valuation technique used and the nature of the inputs.

Based on the fair value hierarchy, the Company classifies its cash equivalents and marketable securities within Level 1 or Level 2. This is because the Company values its cash equivalents and marketable securities using quoted market prices or alternative pricing sources and models utilizing market observable inputs.

Assets measured or disclosed at fair value on a recurring basis as of September 30, 2016 and December 31, 2015 are summarized below:

 

 

 

Fair Value Measurements Using

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

 

(in thousands)

 

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

65,830

 

 

$

 

 

$

 

 

$

65,830

 

Certificates of deposit

 

 

 

 

 

17,575

 

 

 

 

 

 

17,575

 

U.S. Government debt securities

 

 

 

 

 

71,966

 

 

 

 

 

 

71,966

 

Corporate debt securities

 

 

 

 

 

5,951

 

 

 

 

 

 

5,951

 

 

 

$

65,830

 

 

$

95,492

 

 

$

 

 

$

161,322

 

 

 

 

Fair Value Measurements Using

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

49,778

 

 

$

 

 

$

 

 

$

49,778

 

Certificates of deposit

 

 

 

 

 

21,505

 

 

 

 

 

 

21,505

 

U.S. Government debt securities

 

 

 

 

 

46,276

 

 

 

 

 

 

46,276

 

Corporate debt securities

 

 

 

 

 

20,895

 

 

 

 

 

 

20,895

 

 

 

$

49,778

 

 

$

88,676

 

 

$

 

 

$

138,454

 

 

The Company had no assets or liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at September 30, 2016 and December 31, 2015.

 

The Company’s corporate debt securities are all investment grade.

Investment securities are exposed to various risks such as interest rate, market and credit risks. Due to the level of risk associated with certain investment securities and the level of uncertainty related to changes in the value of investment securities, it is at least reasonably possible that changes in risks in the near term would result in material changes in the fair value of investments.

 

 

15


5. Accrued Expenses

Accrued expenses are as follows:

 

 

 

 

 

 

 

September 30, 2016

 

 

December 31, 2015

 

 

 

(in thousands)

 

Accrued clinical

 

$

12,490

 

 

$

4,536

 

Accrued bonus

 

 

1,876

 

 

 

2,178

 

Professional fees

 

 

619

 

 

 

647

 

Accrued vacation

 

 

378

 

 

 

310

 

Accrued payroll

 

 

259

 

 

 

518

 

Accrued severance

 

 

44

 

 

 

Other

 

 

1,949

 

 

 

1,366

 

Total accrued expenses

 

$

17,615

 

 

$

9,555

 

      

In January 2016, the Company entered into separation agreements with two employees.  During the first quarter of 2016, the Company recorded severance expense in the amount of $0.4 million, of which $0.2 million was recorded to general and administrative expense and $0.2 million was recorded to research and development expense.  During the three months ended September 30, 2016, approximately $0.2 million was paid out of the severance accrual and during the nine months ended September 30, 2016, approximately $0.4 was paid out of the severance accrual.  

 

 

6. Stockholders’ Equity

Authorized and Outstanding Capital Stock

As of December 31, 2014, the authorized capital stock of the Company included 175,000,000 shares of common stock, par value $0.00001 per share, of which 38,253,190 and 30,662,218 shares are issued and outstanding at September 30, 2016 and December 31, 2015, respectively; and 25,000,000 shares of undesignated preferred stock, par value $0.00001 per share, of which 0 shares are issued and outstanding at September 30, 2016 and December 31, 2015.

Equity Plans

On February 28, 2014, the Company’s Board of Directors adopted its 2014 Incentive Plan (2014 Plan) and its 2014 Employee Stock Purchase Plan (ESPP), which were subsequently approved by its stockholders and became effective upon the closing of the Company’s initial public offering on March 25, 2014. The 2014 Plan replaces the 2008 Equity Incentive Plan (2008 Plan), however, any options or awards outstanding under the 2008 Plan at the time of adoption of the 2014 Plan remain outstanding and effective.

The 2014 Plan allows for the granting of stock options, stock appreciation rights, or SARs, restricted stock, unrestricted stock, stock units, performance awards and other awards convertible into or otherwise based on shares of our common stock. Dividend equivalents may also be provided in connection with an award under the 2014 Plan. The Company’s employees, officers, directors and consultants and advisors are eligible to receive awards under the 2014 Plan. The Company initially reserved 1,785,000 shares of its common stock for the issuance of awards under the 2014 Plan. The 2014 Plan provides that the number of shares reserved and available for issuance under the 2014 Plan will automatically increase annually on January 1st of each calendar year, by an amount equal to three percent (3%) of the number of shares of stock outstanding on a fully diluted basis as of the close of business on the immediately preceding December 31st  (2014 Plan Evergreen Provision). The Company’s Board of Directors may act prior to January 1st of any year to provide that there will be no automatic increase in the number of shares available for grant under the 2014 Plan for that year (or that the increase will be less than the amount that would otherwise have automatically been made). Subject to adjustment, no more than 1,131,937 shares of our common stock may be delivered in satisfaction of incentive stock options awarded under the 2014 Plan.  During the first nine months of 2016, the Company granted 1,092,275 stock options to employees, 449,838 RSUs to employees and 112,500 stock options to directors under the 2014 Plan.  

The ESPP authorizes the initial issuance of up to a total of 262,500 shares of the Company’s common stock to participating employees.  The maximum aggregate number of shares of common stock available for purchase pursuant to the exercise of options granted under the ESPP will be the lesser of (a) 262,500 shares, increased on each anniversary of the adoption of the ESPP by one percent (1%) of the total shares of common stock then outstanding and (b) 739,611 shares (which is equal to five percent (5%) of the total shares of common stock outstanding on the date of the adoption of the ESPP on a fully diluted, as converted basis (ESPP Evergreen Provision). Under the ESPP, each offering period is six months, at the end of which employees may purchase shares of common stock through payroll deductions made over the term of the offering. The per-share purchase price at the end of each offering period is equal to the lesser of 85% of the closing price of our common stock at the beginning or end of the offering period.  

16


Shares Reserved for Future Issuance

The Company has reserved for future issuance the following number of shares of common stock:

 

 

 

 

 

 

 

September 30, 2016

 

 

December 31, 2015

 

Common stock options and RSU's outstanding

 

 

3,416,546

 

 

 

2,231,057

 

Shares available for issuance under the 2014 Plan (1)

 

 

1,035,605

 

 

 

1,318,732

 

Shares available for issuance under the ESPP (2)

 

 

803,105

 

 

 

440,304

 

Total

 

 

5,255,256

 

 

 

3,990,093

 

 

 

(1)

On January 1, 2016, the shares reserved for future grants under the 2014 Plan increased by 986,800 shares pursuant to the 2014 Plan Evergreen Provision.

 

(2)

On February 28, 2016, the shares reserved for future issuance under the ESPP increased by 379,430 shares pursuant to the ESPP Evergreen Provision.

Stock-Based Compensation

Stock Options

On February 22, 2016, as part of the Company’s annual grant of equity, the Company issued 624,275 stock options to employees. In addition, the Company issues stock options to new hires and occasionally to other employees not in connection with the annual grant process.  Options granted by the Company vest over periods of between 12 and 48 months. Options vest in installments of (i) 25% at the one year anniversary and (ii) in either 36 or 48 equal monthly or 12 equal quarterly installments beginning in the thirteenth month after the initial Vesting Commencement Date (as defined) or grant date, subject to the employee’s continuous service with the Company. Options generally expire ten years after the date of grant. The Company recorded approximately $1.2 million of stock-based compensation expense related to stock options during the three months ended September 30, 2016 and approximately $3.4 million during the nine months ended September 30, 2016.

Restricted Stock

On December 23, 2013, the Company issued 450,224 shares of restricted stock to employees and 79,067 shares of restricted stock to non-employees at a grant date fair value of $7.42 per share.  The aggregate grant date fair value for the shares of restricted stock issued on December 23, 2013 totaled approximately $3.9 million. The awards of restricted stock contained a performance condition wherein vesting is contingent upon the Company’s consummation of a liquidity event, as defined, prior to the fifth anniversary of the date of grant. Certain of the awards of restricted stock have a requisite service period that was complete upon grant. The remainder of the awards of restricted stock have a requisite service period of four years whereby the award vests 25% on the one year anniversary of the Vesting Commencement Date (as defined), then ratably on the first day of each calendar quarter for 12 quarters, subject to continuous service by the individual and achievement of the performance target. Due to the nature of the performance condition, the Company had concluded that the performance condition was not probable of achievement and therefore, recognition of compensation cost had been deferred until the occurrence of a liquidity event, as defined.  Compensation expense related to the restricted stock awards is being recognized over the associated requisite service period which commenced on March 25, 2014. The Company recorded approximately $0.1 million of stock-based compensation expense related to restricted stock during the three months ended September 30, 2016 and recorded approximately $0.1 million during the nine months ended September 30, 2016 as a result of mark to market adjustments related to non-employees.  

Restricted Stock Units

On February 22, 2016, as part of the Company’s annual grant of equity, the Company issued 382,338 RSUs to employees.  In addition, the Company occasionally issues RSUs not in connection with the annual grant process to employees.  The RSUs vest 100% on the third year anniversary of the grant date.  Total stock-compensation expense to be recognized over the life of the RSUs is $2.9 million and will be recognized on a straight-line basis over the vesting period. The Company recorded approximately $0.2 million of stock-based compensation expense related to the RSUs during the three months ended September 30, 2016 and approximately $0.5 million during the nine months ended September 30, 2016.

ESPP

The first offering period under the ESPP opened on January 2, 2015.  There were 16,629 shares issued during the second quarter of 2016.  The Company recorded approximately $32,000 of stock-based compensation expense related to ESPP during the three months ended September 30, 2016 and approximately $79,000 during the nine months ended September 30, 2016.

17


Compensation Expense Summary

The Company has recognized the following compensation cost related to share-based awards:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 2016

 

 

September 30, 2015

 

 

September 30, 2016

 

 

September 30, 2015

 

 

 

(in thousands)

 

 

(in thousands)

 

Research and development

 

$

636

 

 

$

468

 

 

$

1,393

 

 

$

1,431

 

General and administrative

 

 

992

 

 

 

694

 

 

 

2,708

 

 

 

1,955

 

Total

 

$

1,628

 

 

$

1,162

 

 

$

4,101

 

 

$

3,386

 

 

Compensation expense by type of award:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 2016

 

 

September 30, 2015

 

 

September 30, 2016

 

 

September 30, 2015

 

 

 

(in thousands)

 

 

(in thousands)

 

Stock options

 

$

1,229

 

 

$

1,065

 

 

$

3,378

 

 

$

2,673

 

Restricted stock

 

 

135

 

 

 

61

 

 

 

148

 

 

 

604

 

Restricted stock units

 

 

232

 

 

 

13

 

 

 

496

 

 

 

44

 

Employee stock purchase plan

 

 

32

 

 

 

23

 

 

 

79

 

 

 

65

 

Total

 

$

1,628

 

 

$

1,162

 

 

$

4,101

 

 

$

3,386

 

 

 

7. Income Taxes

Deferred tax assets and deferred tax liabilities are recognized based on temporary differences between the financial reporting and tax basis of assets and liabilities using statutory rates. A valuation allowance is recorded against deferred tax assets if it is more likely than not that some or all of the deferred tax assets will not be realized. There were no significant income tax provisions or benefits for the three or nine months ended September 30, 2016 and 2015. Due to the uncertainty surrounding the realization of the favorable tax attributes in future tax returns, the Company has recorded a full valuation allowance against the Company’s otherwise recognizable net deferred tax assets.

 

 

8. Commitments and Contingencies

The Company leases approximately 45,362 square feet of office and lab space in Cambridge, Massachusetts under a lease which was most recently amended in July 2016, collectively, the Lease.  Total monthly lease payments for base rent are approximately $242,000 per month which is subject to annual rent escalations. In addition to such annual rent escalations, base rent payments for a portion of said premises are scheduled to commence on or about January 1, 2017 in the monthly amount of approximately $22,000.  Landlord contributions included in the Lease from the landlord totaled $2,169,920, including $256,765 in leasehold improvements not yet utilized.  The landlord contributions are being accounted for as a deferred lease incentive and reduction in monthly rent expense over the term of the Lease. The term of the Lease with respect to the office space expires on September 11, 2026, with one five year extension option available.  The term of the Lease for the lab space is five years, with an extension option for one additional period of two years. The total security deposit in connection with the Lease of $1,280,857 is included in other assets in the Company’s condensed consolidated balance sheets as of September 30, 2016 and December 31, 2015.  

The Company recognizes rent expense for the space which it currently occupies and records a deferred lease obligation representing the cumulative difference between actual facility lease payments and lease expense recognized ratably over the lease period, which is included in the Company’s condensed consolidated balance sheets as of September 30, 2016 and December 31, 2015.  The Company will begin recognizing rent expense for the lab space and the remaining office space, which the Company did not yet occupy as of September 30, 2016, subsequent to taking possession of the space.

The Company leases office equipment under three year capital leases with payments commencing in February 2014, April 2015 and February 2016, respectively.  The capital lease amounts are included in accrued expenses and other liabilities.     

18


At September 30, 2016, the Company’s future minimum payments required under these leases are as follows:

 

 

 

Operating

 

 

Capital

 

 

 

 

 

 

 

Lease

 

 

Lease

 

 

Total

 

 

 

(in thousands)

 

2016

 

$

714

 

 

$

3

 

 

$

717

 

2017

 

 

3,122

 

 

 

9

 

 

 

3,131

 

2018

 

 

3,122

 

 

 

5

 

 

 

3,127

 

2019

 

 

3,122

 

 

 

 

 

 

3,122

 

2020

 

 

3,122

 

 

 

 

 

 

3,122

 

Thereafter

 

 

17,789

 

 

 

 

 

 

17,789

 

Total

 

$

30,991

 

 

 

17

 

 

$

31,008

 

Less amount representing interest

 

 

 

 

 

 

 

 

 

 

 

Present value of minimum lease payments

   at September 30, 2016

 

 

 

 

 

$

17

 

 

 

 

 

 

The Company recorded approximately $0.6 million and $0.2 million in rent expense for the three months ended September 30, 2016 and 2015, respectively and $1.7 million and $0.6 million in rent expense for the nine months ended September 30, 2016 and 2015, respectively.

Under the Company’s agreement with a subsidiary of Quintiles IMS Holdings, Inc., or Quintiles, to provide services for the PRO2TECT and INNO2VATE programs, the total remaining contract costs as of September 30, 2016 were approximately $423.9 million. The estimated period of performance for the committed work with Quintiles is through the third quarter of 2019.  The Company contracts with various other organizations to conduct research and development activities with remaining contract costs to the Company of approximately $22.0 million and $5.2 million at September 30, 2016 and December 31, 2015, respectively. The scope of the services under the research and development contracts can be modified and the contracts cancelled by the Company upon written notice. In some instances, the contracts may be cancelled by the third party upon written notice.

In September 2015, a purported securities class action lawsuit was filed against the Company, including its Chief Executive Officer, its Chief Financial Officer, and members of the Company’s Board of Directors, in the Business Litigation Section of the Suffolk County Superior Court of Massachusetts.  The complaint is brought on behalf of an alleged class of those who purchased common stock of the Company pursuant or traceable to the Company’s initial public offering, and purports to allege claims arising under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933, as amended.  The complaint generally alleges that the defendants violated the federal securities laws by, among other things, making material misstatements or omissions concerning the Phase 2b clinical study of vadadustat.  The complaint seeks, among other relief, unspecified compensatory damages, rescission of certain stock purchases, attorneys’ fees, and costs.  In October 2015, the Company removed the case to the United States District Court for the District of Massachusetts, and the plaintiff filed a motion to remand the case back to the Business Litigation Section of the Suffolk County Superior Court of Massachusetts.  The plaintiff’s motion to remand was granted in April 2016.  The plaintiff filed an amended complaint in the Suffolk County Superior Court on August 15, 2016, and the Company served a memorandum in support of its motion to dismiss the amended complaint on October 14, 2016.  The Company believes such claims are without merit and will engage in a vigorous defense of such litigation.

The Company has had a number of positive developments in our opposition and invalidity proceedings against FibroGen, Inc., or FibroGen.  With regard to the opposition that the Company filed in Europe against FibroGen’s European Patent No. 1463823, or the ’823 patent, an oral proceeding took place March 8 and 9, 2016.  Following the oral proceeding, the European Opposition Division ruled that the patent as granted did not meet the requirements for patentability under the European Patent Convention and, therefore, revoked the patent in its entirety.  FibroGen has appealed that decision. Likewise, with regard to the invalidity proceeding that the Company filed in Japan against certain claims of FibroGen’s Japanese Patent No. 4804131, or the ’131 patent, which is the Japanese counterpart to the ’823 patent, the Japan Patent Office, or JPO, issued a preliminary decision finding all of the challenged claims to be invalid.  FibroGen subsequently amended the claims and the JPO accepted the amendments.  The resulting FibroGen Japanese ’131 patent does not cover vadadustat or any pyridine carboxamide compounds. To date, FibroGen has been unsuccessful in its attempts to obtain a patent in the United States covering the same claim scope as it obtained initially in Europe and Japan in the ’823 and ’131 patents.  In the event FibroGen were to obtain such a patent in the United States, the Company may decide to challenge them like the Company has done in Europe and Japan. 

On May 13, 2015, May 20, 2015 and July 6, 2015 the Company filed oppositions to FibroGen’s European Patent Nos. 2322153, 2322155, and 1633333, or the ’153 patent, the ’155 patent, and the ’333 patent, respectively, requesting the patents be revoked in their entirety. These related patents claim, among other things, various compounds that either stabilize HIFα or inhibit a HIF hydroxylase or a HIF prolyl hydroxylase for treating or preventing various conditions, including, inter alia, iron deficiency, microcytosis associated with iron deficiency, anemia of chronic disease, anemia wherein the subject has a transferrin saturation of less than 20%, anemia

19


refractory to treatment with exogenously administered erythropoietin, or EPO, and microcytosis in microcytic anemia.  Oppositions to the ’155 patent and to the ’153 patent were also filed by Glaxo Group Limited and by Bayer Intellectual Property GmbH, Bayer Pharma Aktiengesellschaft, and Bayer Animal Health GmbH.  While, for the reasons set forth in our oppositions, the Company believes that the ’153 patent, the ’155 patent, and the ’333 patent should be revoked in their entirety, the ultimate outcomes of the oppositions remains uncertain. If the European Patent Office decides not to revoke the ’153 patent, the ’155 patent, or the ’333 patent in their entirety, or only certain claims of those patents, and any surviving claims are determined to encompass the Company’s intended use of the Company’s lead product candidate, the Company may not be able to commercialize the Company’s lead product candidate in the European Union for its intended use, which could materially adversely affect the Company’s business, operating results and financial condition.

The Company’s policy is to record a liability if a loss in a significant legal dispute is considered probable and an amount can be reasonably estimated.   The Company provides disclosure when a loss in excess of any reserve is reasonably possible, and the Company is in a position to estimate the potential loss or range of possible loss.  Significant judgment is required to assess the likelihood of various potential outcomes and the quantification of loss in those scenarios.  The Company’s estimates change as litigation progresses and new information comes to light.  Changes in Company estimates could have a material impact on the Company’s results and financial position.

 

 

9. Significant Agreements

Mitsubishi Tanabe Pharma Collaboration Agreement

On December 11, 2015, the Company and MTPC, entered into a collaboration agreement (Collaboration Agreement) providing MTPC with exclusive development and commercialization rights to vadadustat, the Company’s product candidate for the treatment of anemia related to chronic kidney disease, in Japan and certain other Asian countries (collectively, the Territory).

Pursuant to the Collaboration Agreement, MTPC will have an exclusive license to develop and commercialize vadadustat in the Territory. In addition, the Company will supply vadadustat for both clinical and commercial use in the Territory. The countries included in the Territory are Japan, Taiwan, South Korea, Singapore, Malaysia, India, Indonesia, East Timor, Mongolia, the Philippines, Vietnam, Laos, Cambodia, Thailand, Brunei, Myanmar, Nepal, Sri Lanka, Bangladesh, Bhutan, Maldives, Palau and Tonga.

In consideration for the exclusive license and other rights contained in the Collaboration Agreement, MTPC will make payments totaling up to $100.0 million to fund the vadadustat global Phase 3 program, including $40.0 million paid in January 2016. If Japanese patients are not included in either the global Phase 3 PRO2TECT or INNO2VATE programs, $20.0 million of the $40.0 million received would be used to fund further local development of vadadustat in Japan or be refunded to MTPC.  The Company is also eligible to receive up to approximately $250.0 million in additional milestone payments, based upon achievement of certain development and sales milestones as well as tiered royalty payments, from low teens up to twenty percent, on sales of vadadustat in the Territory.

The Company and MTPC have established a joint steering committee to oversee development and commercialization of vadadustat in the Territory, including approval of any development or commercialization plans. Unless earlier terminated, the Collaboration Agreement will continue in effect on a country-by-country basis until the later of: expiration of the last-to-expire patent covering vadadustat in such country in the Territory; expiration of marketing or regulatory exclusivity in such country in the Territory; or ten (10) years after the first commercial sale of vadadustat in such country in the Territory. MTPC may terminate the Collaboration Agreement upon twelve (12) months’ notice at any time after the second anniversary of the effective date of the Collaboration Agreement. Either party may terminate the Collaboration Agreement upon the material breach of the other party that is not cured within a specified time period or upon the insolvency of the other party.  

As of September 30, 2016, there is $40.0 million of deferred revenue related to the Company’s Collaboration Agreement, all of which is classified as long‑term in the accompanying condensed consolidated balance sheet.  Revenue recognition for the Collaboration Agreement will commence when all criteria as required under ASC 605 have been satisfied, which the Company expects will be in 2017 when the scope of the Phase 3 program is agreed upon with Japanese regulatory authorities.

 

 

10. Employee Retirement Plan

During 2008, the Company established a retirement plan (the Plan) authorized by Section 401(k) of the Internal Revenue Code. In accordance with the Plan, all employees who have attained the age of 21 are eligible to participate in the Plan as of the first Entry Date, as defined, following their date of employment. Each employee can contribute a percentage of compensation up to a maximum of the statutory limits per year. Company contributions are discretionary and contributions in the amount of approximately $21,000

20


and $71,000 were made during the three months ended September 30, 2016 and 2015, respectively, and $141,000 and $71,000 were made during the nine months ended September 30, 2016 and 2015, respectively.

 

 

11. Net Loss per Share

The shares in the table below were excluded from the calculation of diluted net loss per share, prior to the use of the treasury stock method, due to their anti-dilutive effect:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 2016

 

 

September 30, 2015

 

 

September 30, 2016

 

 

September 30, 2015

 

Outstanding stock options

 

 

2,977,986

 

 

 

2,251,908

 

 

 

2,977,986

 

 

 

2,251,908

 

Unvested restricted stock

 

 

132,739