10-Q 1 vktx-10q_20180630.htm 10-Q vktx-10q_20180630.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended June 30, 2018

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 001-37355

 

VIKING THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

46-1073877

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

 

 

12340 El Camino Real, Suite 250

San Diego, California

 

92130

(Address of Principal Executive Offices)

 

(Zip Code)

 

(858) 704-4660

(Registrant’s telephone number, including area code)

 

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

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

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

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

 

Smaller reporting company

 

 

 

 

 

Emerging growth company

 

 

 

 

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

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

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

 

Class

 

Number of Shares Outstanding

as of July 31, 2018

Common stock, $0.00001 par value

 

60,657,794

 


VIKING THERAPEUTICS, INC.

FORM 10-Q FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2018

TABLE OF CONTENTS

 

 

 

 

Page

 

 

 

 

 

Part I.

 

FINANCIAL INFORMATION

 

1

 

 

 

 

 

Item 1.

 

Financial Statements

 

1

 

 

 

 

 

 

 

Balance Sheets as of June 30, 2018 (unaudited) and December 31, 2017

 

1

 

 

 

 

 

 

 

Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2018 and 2017 (unaudited)

 

2

 

 

 

 

 

 

 

Statements of Stockholders’ Equity for the six months ended June 30, 2018

 

3

 

 

 

 

 

 

 

Statements of Cash Flows for the six months ended June 30, 2018 and 2017 (unaudited)

 

4

 

 

 

 

 

 

 

Notes to Financial Statements (unaudited)

 

5

 

 

 

 

 

Item 2.

 

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

 

21

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

28

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

28

 

 

 

 

 

Part II.

 

OTHER INFORMATION

 

29

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

29

 

 

 

 

 

Item 1A.

 

Risk Factors

 

29

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

58

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

59

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

59

 

 

 

 

 

Item 5.

 

Other Information

 

59

 

 

 

 

 

Item 6.

 

Exhibits

 

60

 

 

 

 

 

SIGNATURES

 

61

 

 

 


PART I. FINANCIAL INFORMATION

 

 

Item 1.

Financial Statements

Viking Therapeutics, Inc.

Balance Sheets

 

(In thousands, except share and per share amounts)

 

 

 

June 30,

2018

 

 

December 31,

2017

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

34,610

 

 

$

8,988

 

Short-term investments – available for sale

 

 

107,556

 

 

 

11,587

 

Prepaid clinical trial and preclinical study costs

 

 

1,499

 

 

 

887

 

Prepaid expenses and other current assets

 

 

593

 

 

 

389

 

Total current assets

 

 

144,258

 

 

 

21,851

 

Deferred public offering and other financing costs

 

 

210

 

 

 

270

 

Total assets

 

$

144,468

 

 

$

22,121

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,493

 

 

$

1,529

 

Other accrued liabilities

 

 

2,612

 

 

 

2,257

 

Accrued interest, current

 

 

 

 

 

22

 

Convertible notes payable, current (net of discount of $0 and $404 at June 30, 2018 and December 31, 2017, respectively)

 

 

 

 

 

3,451

 

Debt conversion feature liability, current

 

 

 

 

 

1,398

 

Total current liabilities

 

 

4,105

 

 

 

8,657

 

Total liabilities

 

 

4,105

 

 

 

8,657

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.00001 par value: 10,000,000 shares authorized at June 30, 2018 and December 31, 2017; no shares issued and outstanding at June 30, 2018 and December 31, 2017

 

 

 

 

 

 

Common stock, $0.00001 par value: 300,000,000 shares authorized at June 30, 2018 and December 31, 2017; 60,652,794 and 35,817,104 shares issued and outstanding at June 30,  2018 and December 31, 2017, respectively

 

 

1

 

 

 

 

Additional paid-in capital

 

 

231,587

 

 

 

94,339

 

Accumulated deficit

 

 

(91,078

)

 

 

(80,855

)

Accumulated other comprehensive loss

 

 

(147

)

 

 

(20

)

Total stockholders’ equity

 

 

140,363

 

 

 

13,464

 

Total liabilities and stockholders’ equity

 

$

144,468

 

 

$

22,121

 

 

See accompanying notes to the financial statements.

 

 

1


Viking Therapeutics, Inc.

Statements of Operations and Comprehensive Loss

 

(In thousands, except per share amounts)

(Unaudited)

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues

 

$

 

 

$

 

 

$

 

 

$

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

5,221

 

 

 

3,716

 

 

 

8,264

 

 

 

7,243

 

General and administrative

 

 

1,704

 

 

 

1,267

 

 

 

3,466

 

 

 

2,708

 

Total operating expenses

 

 

6,925

 

 

 

4,983

 

 

 

11,730

 

 

 

9,951

 

Loss from operations

 

 

(6,925

)

 

 

(4,983

)

 

 

(11,730

)

 

 

(9,951

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of debt conversion feature liability

 

 

37

 

 

 

571

 

 

 

1,398

 

 

 

848

 

Amortization of debt discount

 

 

(146

)

 

 

(337

)

 

 

(404

)

 

 

(768

)

Amortization of financing costs

 

 

(30

)

 

 

(422

)

 

 

(60

)

 

 

(520

)

Interest income (expense), net

 

 

392

 

 

 

(1

)

 

 

573

 

 

 

(3

)

Total other income (expense), net

 

 

253

 

 

 

(189

)

 

 

1,507

 

 

 

(443

)

Net loss

 

 

(6,672

)

 

 

(5,172

)

 

 

(10,223

)

 

 

(10,394

)

Other comprehensive loss, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized (loss) gain on securities

 

 

(38

)

 

 

2

 

 

 

(127

)

 

 

1

 

Comprehensive loss

 

$

(6,710

)

 

$

(5,170

)

 

$

(10,350

)

 

$

(10,393

)

Basic and diluted net loss per common share

 

$

(0.13

)

 

$

(0.21

)

 

$

(0.21

)

 

$

(0.45

)

Weighted-average shares used to compute basic and diluted net loss per share

 

 

52,767

 

 

 

24,119

 

 

 

48,730

 

 

 

23,241

 

 

See accompanying notes to the financial statements.

 

 

2


Viking Therapeutics, Inc.

Statement of Stockholders’ Equity

 

(In thousands, except share amounts)

(Unaudited)

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Accumulated

 

 

Accumulated Other

Comprehensive

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Loss

 

 

Total

 

Balance at December 31, 2017

 

 

35,817,104

 

 

$

 

 

$

94,339

 

 

$

(80,855

)

 

$

(20

)

 

$

13,464

 

Employee stock-based compensation

 

 

(22,341

)

 

 

 

 

 

1,142

 

 

 

 

 

 

 

 

 

1,142

 

Issuance of common stock under employee stock plans

 

 

235,865

 

 

 

 

 

 

313

 

 

 

 

 

 

 

 

 

313

 

Issuance of common stock from warrant exercises

 

 

3,347,346

 

 

 

 

 

 

4,826

 

 

 

 

 

 

 

 

 

4,826

 

Sale of common stock, net of issuance costs

 

 

21,275,000

 

 

 

1

 

 

 

130,967

 

 

 

 

 

 

 

 

 

130,968

 

Unrealized gain (loss) on investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(127

)

 

 

(127

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(10,223

)

 

 

 

 

 

(10,223

)

Balance at June 30, 2018

 

 

60,652,974

 

 

$

1

 

 

$

231,587

 

 

$

(91,078

)

 

$

(147

)

 

$

140,363

 

 

 

 


3


Viking Therapeutics, Inc.

Statements of Cash Flows

 

(In thousands)

(Unaudited)

 

 

 

Six Months Ended June 30,

 

 

2018

 

 

2017

 

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

Net loss

 

$

(10,223

)

 

$

(10,394

)

 

Adjustments to reconcile net loss to net cash used in operating

   activities

 

 

 

 

 

 

 

 

 

Amortization of debt discount on notes payable

 

 

404

 

 

 

768

 

 

Amortization of investment premiums

 

 

149

 

 

 

49

 

 

Amortization of financing costs

 

 

60

 

 

 

520

 

 

Amortization of non-cash clinical trial costs

 

 

477

 

 

 

400

 

 

Change in fair value of debt conversion feature liability

 

 

(1,398

)

 

 

(848

)

 

Stock-based compensation

 

 

1,241

 

 

 

743

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

(1,396

)

 

 

54

 

 

Accounts payable

 

 

(3

)

 

 

57

 

 

Accrued expenses

 

 

116

 

 

 

1,169

 

 

Net cash used in operating activities

 

 

(10,573

)

 

 

(7,482

)

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

 

Purchases of investments

 

 

(113,707

)

 

 

(10,426

)

 

Proceeds from maturities of investments

 

 

17,455

 

 

 

11,700

 

 

Net cash (used in) provided by investing activities

 

 

(96,252

)

 

 

1,274

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

 

Proceeds from issuances of common stock, net of underwriting discounts and commissions

 

 

131,402

 

 

 

6,582

 

 

Public offering and financing costs

 

 

(266

)

 

 

(62

)

 

Repayment of convertible notes payable

 

 

(3,833

)

 

 

 

 

Value of shares withheld related to employee tax withholding

 

 

(99

)

 

 

(14

)

 

Proceeds from warrant and option exercises and stock issuance under employee stock purchase plan

 

 

5,243

 

 

 

20

 

 

Net cash provided by financing activities

 

 

132,447

 

 

 

6,526

 

 

Net increase in cash and cash equivalents

 

 

25,622

 

 

 

318

 

 

Cash and cash equivalents beginning of period

 

 

8,988

 

 

 

3,076

 

 

Cash and cash equivalents end of period

 

$

34,610

 

 

$

3,394

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

 

Cash paid during the period for interest

 

$

81

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing

   transactions

 

 

 

 

 

 

 

 

 

Shares issued to cover future clinical trial costs

 

$

 

 

$

1,800

 

 

Unpaid deferred public offering and other financing costs

 

$

309

 

 

$

148

 

 

See accompanying notes to the financial statements.

 

 

4


Viking Therapeutics, Inc.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

 

 

1. Organization, Liquidity and Management’s Plan, and Summary of Significant Accounting Policies

The Company

Viking Therapeutics, Inc., a Delaware corporation (the “Company”), is a clinical-stage biopharmaceutical company focused on the development of novel therapies for metabolic and endocrine disorders.

The Company was incorporated under the laws of the State of Delaware on September 24, 2012 and its principal executive offices are located in San Diego, California.

Basis of Presentation

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The accompanying balance sheet as of June 30, 2018, statements of operations for the three and six months ended June 30, 2018 and 2017 and statements of cash flows for the six months ended June 30, 2018 and 2017 are unaudited. These unaudited financial statements have been prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These financial statements should be read in conjunction with the audited financial statements and the accompanying notes for the year ended December 31, 2017 contained in the Annual Report on Form 10-K filed by the Company with the SEC on March 7, 2018. The unaudited interim financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments (consisting of normal recurring adjustments) necessary to state fairly the Company’s financial position as of June 30, 2018, the results of operations for the three and six months ended June 30, 2018 and 2017 and cash flows for the six months ended June 30, 2018 and 2017. The December 31, 2017 balance sheet included herein was derived from the audited financial statements, but does not include all disclosures or notes required by GAAP for complete financial statements.

The financial data and other information disclosed in these notes to the financial statements related to the three and six months ended June 30, 2018 and 2017 are unaudited. Interim results are not necessarily indicative of results for an entire year.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the accompanying financial statements. Significant estimates made in preparing these financial statements relate to determining the fair value of the debt conversion feature liability, through May 21, 2018, and accounting for certain commitments. Actual results could differ from those estimates.

Recent Accounting Pronouncements

Adopted Accounting Standards

 

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes all existing revenue recognition requirements, including most industry-specific guidance. The new standard requires a company to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that the company expects to receive for those goods or services. The FASB has subsequently issued the following amendments to ASU No. 2014-09, which have the same effective date and transition date of January 1, 2018:

 

 

In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delayed the effective date of the new standard from January 1, 2017 to January 1, 2018. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date.

 

In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations, which clarifies the implementation guidance on principal versus agent considerations.

5


 

In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which clarifies certain aspects of identifying performance obligations and licensing implementation guidance.

 

In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which relates to disclosures of remaining performance obligations, as well as other amendments to guidance on collectability, non-cash consideration and the presentation of sales and other similar taxes collected from customers.

 

In December 2016, the FASB issued ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which amends certain narrow aspects of the guidance issued in ASU No. 2014-09 including guidance related to the disclosure of remaining performance obligations and prior-period performance obligations, as well as other amendments to the guidance on loan guarantee fees, contract costs, refund liabilities, advertising costs and the clarification of certain examples.

 

The Company evaluated the potential impact that these standards had on its financial position and results of operations.  There is no current impact of this new guidance on its financial statements as the Company does not currently have any revenue generating arrangements.

 

In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which amends ASC Topic 230 to add or clarify guidance on eight classification issues related to the statement of cash flows such as debt prepayment or debt extinguishment costs, and contingent consideration payments made after a business combination. ASU 2016-15 is effective for fiscal periods beginning after December 15, 2017 and must be adopted using a retrospective transition method to each period presented but may be applied prospectively if retrospective application would be impracticable. Early adoption is permitted, including adoption in an interim period. The Company’s adoption of ASU 2016-15 on January 1, 2018 did not have a material effect on its financial statements and related disclosures.

 

In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (“ASU 2017-09”), which clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as a modification. Entities will apply the modification accounting guidance if the value, vesting conditions, or classification of the award changes. The Company’s adoption of ASU 2017-09 on January 1, 2018 did not have a material effect on its financial statements and related disclosures.

 

In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718) (“ASU 2018-07”), which simplifies the accounting for non-employee share-based payment transactions. The new standard expands the scope of ASC Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees. ASU 2018-07 is effective for fiscal years beginning after December 15, 2018 (including interim periods within that fiscal year), with early adoption permitted. The Company adopted the new standard in the second quarter of 2018 and determined that the application of the new standard did not have a material effect on its financial statements and related disclosures.

 

Recent Accounting Pronouncements Not Yet Adopted

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which amends the existing accounting standards for leases. The new standard requires lessees to record a right-of-use asset and a corresponding lease liability on the balance sheet (with the exception of short-term leases). For lessees, leases will continue to be classified as either operating or financing in the statement of operations. This ASU becomes effective for the Company in the first quarter of fiscal year 2019 and early adoption is permitted. ASU 2016-02 is required to be applied with a modified retrospective approach and requires application of the new standard at the beginning of the earliest comparative period presented. The Company does not expect the adoption of ASU 2016-02 to have a material effect on its financial statements and related disclosures.

 

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires that financial assets measured at amortized cost be presented at the net amount expected to be collected. Currently, GAAP delays recognition of the full amount of credit losses until the loss is probable of occurring. Under this new standard, the statement of operations will reflect an entity’s current estimate of all expected credit losses. The measurement of expected credit losses will be based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses rather than as a direct write-down to the security. The new standard is effective for the Company for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is evaluating the effect that ASU 2016-13 will have on its financial statements and related disclosures.

6


 

In July 2017, the FASB issued a two-part ASU No. 2017-11, I. Accounting for Certain Financial Instruments with Down Round Features and II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception (“ASU 2017-11”). ASU 2017-11 amends guidance in FASB ASC Topic 260: Earnings Per Share, FASB ASC Topic 480: Distinguishing Liabilities from Equity, and FASB ASC Topic 815: Derivatives and Hedging. The amendments in Part I of ASU 2017-11 change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. The amendments in Part II of ASU 2017-11 re-characterize the indefinite deferral of certain provisions of FASB ASC Topic 480 that now are presented as pending content in the ASC, to a scope exception. ASU 2017-11 is effective for the Company for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted.  The Company is evaluating the effect that ASU 2017-11 will have on its financial statements and related disclosures.

Cash and Cash Equivalents

The Company considers all highly liquid investments with maturities of three months or less from the date of purchase to be cash equivalents.

Investments Available-for-Sale

Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported in accumulated other comprehensive income (loss). The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. The amortization of premiums and accretion of discounts is included in interest income. Realized gains and losses and declines in value judged to be other-than-temporary, if any, on available-for-sale securities are included in other income (expense). The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest income.

Concentration of Credit Risk

Financial instruments, which potentially subject the Company to concentration of credit risk, consist primarily of cash and cash equivalents and marketable securities. The Company maintains deposits in federally insured depository institutions in excess of federally insured limits. Management believes that the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held. Additionally, the Company has established guidelines regarding approved investments and maturities of investments, which are designed to maintain safety and liquidity.

Prepaid Clinical Trial and Preclinical Study Costs

Prepaid clinical trial and preclinical study costs represent advance payments by the Company for future clinical trial and preclinical study services to be performed by the clinical research organization and other research organizations.  Such amounts are recognized as research and development expense as the related clinical trial and preclinical study services are performed.  

Deferred Financing Costs

Deferred financing costs represent legal, accounting and other direct costs related to the Company’s efforts to raise capital through a public or private sale of the Company’s common stock. Costs related to public sales of the Company’s common stock are deferred until the completion of the applicable offering, at which time such costs are reclassified to additional paid-in-capital as a reduction of the proceeds.  Costs related to private sales of the Company’s common stock are deferred until the completion of the applicable offering, at which time such costs are amortized over the term of the applicable purchase agreement.

Revenue Recognition

The Company has not recorded any revenues since its inception. However, in the future, the Company may enter into collaborative research and licensing agreements, under which the Company could be eligible for payments made in the form of upfront license fees, research funding, cost reimbursement, contingent event-based payments and/or royalties.

On January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers and all related amendments ("ASC 606" or "the new revenue standard"). ASC 606 is a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The new revenue standard is based on the principle that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, ASC 606 provides that an entity should apply the following steps: (1) identify the contract(s)

7


with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The new revenue standard also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, and costs to obtain or fulfill contracts. The Company will apply ASC 606 prospectively to all contracts.

Research and Development Expenses

All costs of research and development are expensed in the period incurred. Research and development costs primarily consist of fees paid to contract research organizations (“CROs”) and clinical trial sites, employee and consultant related expenses, which include salaries, benefits and stock-based compensation for research and development personnel, external research and development expenses incurred pursuant to agreements with third-party manufacturing organizations, facilities costs, travel costs, dues and subscriptions, depreciation and materials used in preclinical studies, clinical trials and research and development.

The Company estimates its preclinical study and clinical trial expenses based on the services it received pursuant to contracts with research institutions and CROs that conduct and manage preclinical studies and clinical trials on the Company’s behalf. Clinical trial-related contracts vary significantly in length, and may be for a fixed amount, based on milestones or deliverables, a variable amount based on actual costs incurred, capped at a certain limit, or for a combination of these elements. The Company accrues service fees based on work performed, which relies on estimates of total costs incurred based on milestones achieved, patient enrollment and other events. The majority of the Company’s service providers invoice the Company in arrears, and to the extent that amounts invoiced differ from its estimates of expenses incurred, the Company accrues for additional costs. The financial terms of these agreements vary from contract to contract and may result in uneven expenses and payment flows. Preclinical study and clinical trial expenses include:

 

fees paid to CROs, consultants and laboratories in connection with preclinical studies;

 

fees paid to CROs, clinical trial sites, investigators and consultants in connection with clinical trials; and

 

fees paid to contract manufacturers and service providers in connection with the production, testing and packaging of active pharmaceutical ingredients and drug materials for preclinical studies and clinical trials.

Payments under some of these agreements depend on factors such as the milestones accomplished, including enrollment of certain numbers of patients, site initiation and the completion of clinical trial milestones. To date, the Company has not experienced any events requiring it to make material adjustments to its accruals for service fees. If the Company does not identify costs that it has begun to incur or if it underestimates or overestimates the level of services performed or the costs of these services, its actual expenses could differ from its estimates which could materially affect its results of operations. Adjustments to the Company’s accruals are recorded as changes in estimates become evident. Furthermore, based on amounts invoiced to the Company by its service providers, the Company may also record payments made to those providers as prepaid expenses that will be recognized as expense in future periods as services are rendered.

In May 2014, the Company entered into the Master License Agreement, pursuant to which it acquired certain rights to a number of research and development programs from Ligand Pharmaceuticals Incorporated (“Ligand”). In doing so, the Company updated its policy on research and development to include the purchase of rights to intangible assets. In accordance with ASC Topic 730, Research and Development, intangible assets that are acquired and have an alternative future use, as defined, should be capitalized and reported as an intangible asset; however, the cost of acquired intangible assets that do not have alternative future uses should be reported as research and development expense as incurred. The Company notes that intangible assets acquired that are in the preclinical or clinical stages of development when acquired, and not approved by the U.S. Food and Drug Administration, are deemed to have not satisfied the definition of having an alternative future use, as defined. Accordingly, assets acquired in the preclinical and clinical stages of development are expensed as incurred in the Company’s statement of operations.

Patent Costs

Costs related to filing and pursuing patent applications are expensed as incurred to general and administrative expense, as recoverability of such expenditures is uncertain.

Stock-Based Compensation

The Company generally uses the straight-line method to allocate compensation cost to reporting periods over each optionee’s requisite service period, which is generally the vesting period, and estimates the fair value of stock-based awards or restricted stock units to employees and directors using the Black-Scholes option-valuation model. The Black-Scholes model requires the input of subjective assumptions, including volatility, the expected term and the fair value of the underlying common stock on the date of grant, among other inputs. For restricted stock and restricted stock unit awards, the Company generally uses the straight-line method to allocate

8


compensation cost to reporting periods over the holder’s requisite service period, which is generally the vesting period, and uses the fair value at grant date to value the awards. For restricted stock that vests upon the satisfaction of certain performance conditions, the Company recognizes stock-based compensation expense when it becomes probable that the performance conditions will be met. At the point that it becomes probable that the performance conditions will be met, the Company records a cumulative catch-up of the expense from the grant date to the current date, and the Company then amortizes the remainder of the expense over the remaining service period.

Income Taxes

The Company accounts for its income taxes using the liability method whereby deferred tax assets and liabilities are determined based on temporary differences between the basis used for financial reporting and income tax reporting purposes. Deferred income taxes are provided based on the enacted tax rates in effect at the time such temporary differences are expected to reverse. A valuation allowance is provided for deferred tax assets if it is more likely than not that the Company will not realize those tax assets through future operations.

ASC Topic 740-10, Income Taxes, clarifies the accounting for uncertainty in income taxes recognized in the Company’s financial statements in accordance with GAAP.  Income tax positions must meet a more-likely-than-not recognition threshold to be recognized. Income tax positions that previously failed to meet the more-likely-than-not threshold are recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not threshold are derecognized in the first subsequent financial reporting period in which that threshold is no longer met.

The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense.

Net Loss per Common Share

Basic net loss per share is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of common shares outstanding for the period, without consideration for common stock equivalents. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of common share equivalents outstanding for the period determined using the treasury-stock method.  For purposes of this calculation, the Company currently does not have any deemed common share equivalents; therefore, its basic and diluted net loss per share calculations are the same.

The following table presents the computation of basic and diluted net loss per common share (in thousands, except share and per share data):

 

 

 

Three Months Ended June 30,

Six Months Ended June 30,

 

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to common stockholders

 

$

(6,672

)

 

$

(5,172

)

 

$

(10,223

)

 

$

(10,394

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

52,973,371

 

 

 

24,387,148

 

 

 

48,955,952

 

 

 

23,528,353

 

 

Less: Weighted-average shares subject to repurchase

 

 

(206,260

)

 

 

(268,261

)

 

 

(225,571

)

 

 

(287,571

)

 

Denominator for basic net loss per share

 

 

52,767,111

 

 

 

24,118,887

 

 

 

48,730,381

 

 

 

23,240,782

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.13

)

 

$

(0.21

)

 

$

(0.21

)

 

$

(0.45

)

 

 

 

9


Potentially dilutive securities that are not included in the calculation of diluted net loss per share because their effect is anti-dilutive are as follows (in common equivalent shares):

 

 

 

As of June 30,

 

 

 

2018

 

 

2017

 

Common stock warrants

 

 

7,855,190

 

 

 

12,479,837

 

Restricted stock units

 

 

123,625

 

 

 

56,750

 

Common stock subject to repurchase

 

 

183,095

 

 

 

245,096

 

Common stock options

 

 

1,924,151

 

 

 

1,594,894

 

Shares issuable upon conversion of debt

 

 

 

 

 

3,597,271

 

 

 

 

10,086,061

 

 

 

17,973,848

 

 

Segments

The Company operates in only one segment. Management uses cash flows as the primary measure to manage its business and does not segment its business for internal reporting or decision making purposes.

 

 

2. Investments in Marketable Securities

The Company’s investment strategy is focused on capital preservation. The Company invests in instruments that meet the credit quality standards outlined in the Company’s investment policy. This policy also limits the amount of credit exposure to any one issue or type of instrument. As of June 30, 2018 and December 31, 2017, the Company’s investments were in government money market funds, certificates of deposit and corporate debt securities. There were no sales of available-for-sale securities during the three and six months ended June 30, 2018 or during the year ended December 31, 2017.

 

Investments classified as available-for-sale as of June 30, 2018 consisted of the following (in thousands):

 

As of June 30, 2018

 

Amortized

Cost

 

 

Gross

Unrealized

Gains  (1)

 

 

Gross

Unrealized

Losses  (1)

 

 

Aggregate

Estimated

Fair Value

 

Corporate debt securities  (2)

 

$

107,701

 

 

$

 

 

$

(145

)

 

$

107,556

 

 

 

(1)

Unrealized gains and losses on available-for-sale securities are included as a component of comprehensive loss. At June 30, 2018, there were no securities in an unrealized gain position and there were 117 securities in an unrealized loss position. These unrealized losses were less than $7,000 individually and $145,000 in the aggregate. These securities have not been in a continuous unrealized gain or loss position for more than 12 months. The Company does not intend to sell these investments and it is not more likely than not that the Company will be required to sell these investments before recovery of their amortized cost basis, which may be at maturity. The Company reviews its investments to identify and evaluate investments that have an indication of possible other-than-temporary impairment. Factors considered in determining whether a loss is other-than-temporary include the length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the investee, and the Company’s intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value.

 

(2)

At June 30, 2018, none of these securities were classified as cash and cash equivalents on the Company’s balance sheet and none of these securities were scheduled to mature outside of one year.

10


 

Investments classified as available-for-sale as of December 31, 2017 consisted of the following (in thousands):

 

As of December 31, 2017

 

Amortized

Cost

 

 

Gross

Unrealized

Gains  (1)

 

 

Gross

Unrealized

Losses  (1)

 

 

Aggregate

Estimated

Fair Value

 

Certificates of deposit  (2)

 

$

249

 

 

$

 

 

$

 

 

$

249

 

Corporate debt securities  (2)

 

 

11,357

 

 

 

 

 

 

(19

)

 

 

11,338

 

 

 

$

11,606

 

 

$

 

 

$

(19

)

 

$

11,587

 

 

(1)

Unrealized gains and losses on available-for-sale securities are included as a component of comprehensive loss. At December 31, 2017, there were 29 securities in an unrealized loss position. These unrealized losses were less than $3,000 individually and $19,000 in the aggregate. These securities have not been in a continuous unrealized loss position for more than 12 months. The Company does not intend to sell these investments and it is not more likely than not that the Company will be required to sell these investments before recovery of their amortized cost basis, which may be at maturity. The Company reviews its investments to identify and evaluate investments that have an indication of possible other-than-temporary impairment. Factors considered in determining whether a loss is other-than-temporary include the length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the investee, and the Company’s intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value.  

 

(2)

At December 31, 2017, none of these securities were classified as cash and cash equivalents on the Company’s balance sheet and none of these securities were scheduled to mature outside of one year.

 

 

3. Fair Value of Financial Instruments

The Company’s financial instruments consist of cash and cash equivalents, investments and accounts payable and, through May 21, 2018, debt and its related debt conversion feature liability. The carrying amounts reported in the accompanying balance sheets for cash and cash equivalents and accounts payable approximate fair value because of the short-term maturity of those instruments. Further, the Company believes the fair value of the debt approximates its carrying value based on relatively stable interest rates and short-term maturity of this instrument.  Fair value measurements are classified and disclosed in one of the following three categories:

Level 1 —Quoted prices in active markets for identical assets or liabilities.

Level 2 —Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 —Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

As of June 30, 2018 and December 31, 2017, all of the Company’s financial assets that were subject to fair value measurements were valued using observable inputs. The Company’s financial assets valued based on Level 1 inputs consist of money market funds and certificates of deposit. The Company’s financial assets valued based on Level 2 inputs consist of corporate debt securities, which consist of investments in highly-rated investment-grade corporations.

The Company’s financial liability that was subject to fair value measurement consisted of a debt conversion feature that has been recorded as a liability based on Level 3 unobservable inputs as of December 31, 2017. There was no similar financial liability as of June 30, 2018.

The fair value of the debt conversion feature, current as of December 31, 2017 required management to estimate fair value based on the Black-Scholes-Merton option valuation model.  The Black-Scholes-Merton option valuation model was adopted as a result of the Company’s entry in January 2016 into the second amendment to the Loan and Security Agreement with Ligand (the “Loan and Security Agreement”), which amended the conversion terms of the Secured Convertible Promissory Note (“Ligand Note”) issued pursuant to the Loan and Security Agreement.

The debt conversion feature embedded in each tranche of the Ligand Note was accounted for under ASC Topic 815 – Derivatives and Hedging. At each issuance date, the fair value of the debt conversion feature was determined. The fair value of the debt conversion

11


feature was allocated from the gross proceeds of the Ligand Note with the respective discount amortized to interest expense over the original term of the Ligand Note using the effective interest method.  The Company was required to mark to market the value of the conversion feature liability; however, on May 21, 2018, the Company paid in cash the remaining debt balance of the Ligand Note.

The Company’s investment strategy is focused on capital preservation. The Company invests in instruments that meet the credit quality standards outlined in the Company’s investment policy. This policy also limits the amount of credit exposure to any one issue or type of instrument. As of June 30, 2018, the Company’s investments were in government money market funds, certificates of deposit and corporate debt securities.

The fair values of the Company’s financial instruments are presented below (in thousands):

 

 

 

 

 

 

Fair Value Measurements at June 30, 2018

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Financial assets carried at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government money market funds

 

$

25,857

 

 

$

25,857

 

 

$

 

 

$

 

Corporate debt securities, available-for-sale

 

 

10,232

 

 

 

 

 

 

10,232

 

 

 

 

Short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities, available-for-sale

 

 

107,556

 

 

 

 

 

 

107,556

 

 

 

 

Total financial assets

 

$

143,645

 

 

$

25,857

 

 

$

117,788

 

 

$

 

 

 

 

 

 

 

 

Fair Value Measurements at December 31, 2017

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Financial assets carried at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government money market funds

 

$

6,361

 

 

$

6,361

 

 

$

 

 

$

 

Corporate debt securities, available-for-sale

 

 

1,244

 

 

 

 

 

 

1,244

 

 

 

 

Short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit, available-for-sale

 

 

249

 

 

 

 

 

 

249

 

 

 

 

Corporate debt securities, available-for-sale

 

 

11,338

 

 

 

 

 

 

11,338

 

 

 

 

Total financial assets

 

$

19,192

 

 

$

6,361

 

 

$

12,831

 

 

$

 

Financial liabilities carried at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt conversion feature - current

 

$

1,398

 

 

$

 

 

$

 

 

$

1,398

 

Total financial liabilities

 

$

1,398

 

 

$

 

 

$

 

 

$

1,398

 

 

The table below presents a summary of changes in the Company’s debt conversion feature liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2018 and 2017 (in thousands):

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Debt conversion feature:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

37

 

 

$

454

 

 

$

1,398

 

 

$

731

 

Adjustments resulting from modification of debt

 

 

 

 

 

1,011

 

 

 

 

 

$

1,011

 

Adjustments resulting from changes in fair value recognized in earnings

 

 

(37

)

 

 

(571

)

 

 

(1,398

)

 

 

(848

)

Ending balance

 

$

 

 

$

894

 

 

$

 

 

$

894

 

 

 

 

12


The following table sets forth the Company’s valuation techniques and significant unobservable inputs used to determine fair value for significant Level 3 liabilities (in thousands, except for volatility and risk free rate):

 

 

 

Fair Value

 

 

 

 

Significant

 

 

 

 

Assets

 

 

Liabilities

 

 

Valuation Technique(s)

 

Unobservable Input

 

%

Debt conversion feature

   liability

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

$

 

 

$

1,398

 

 

Black-Scholes-Merton option valuation model

 

Volatility

 

100%

 

 

 

 

 

 

 

 

 

 

 

 

Risk Free Rate

 

1.46%

 

 

Level 3 Fair Value Sensitivity

Debt Conversion Feature Liability

As of December 31, 2017, the fair value of the debt conversion feature liability includes the estimated volatility and risk free rate.  The higher/lower the estimated volatility, the higher/lower the value of the debt conversion feature liability. The higher/lower the risk free interest rate, the higher/lower the value of the debt conversion feature liability.

 

4.

Convertible Notes Payable

Convertible notes payable consisted of the following (in thousands):

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Current maturities:

 

 

 

 

 

 

 

 

Convertible note payable issued during 2014 to Ligand pursuant to the Master License Agreement with a 5% annual interest rate, due during 2016 (amended in January 2016 to a 2.5% annual interest rate with maturity extended to 2017, and subsequently amended in May 2017 with maturity extended to May 21, 2018)

 

$

 

 

$

1,917

 

Conversion payoff value

 

 

 

 

 

1,938

 

Discount on notes payable, current

 

 

 

 

 

(404

)

Convertible notes payable, current (net of discount)

 

$

 

 

$

3,451

 

 

Pursuant to the Loan and Security Agreement, among other things, Ligand provided the Company with loans in the aggregate amount of $2.5 million.  Up until January 21, 2016, the principal amount outstanding under the loans accrued interest at a fixed per annum rate equal to the lesser of 5.0% or the maximum interest rate permitted by law. Effective as of January 22, 2016, the principal amount outstanding under the loans accrue interest at a fixed per annum rate equal to the lesser of 2.5% or the maximum interest rate permitted by law. In the event the Company defaults under the loans, the loans will accrue interest at a fixed per annum rate equal to the lesser of 8% or the maximum interest rate permitted by law. The loans are evidenced by the Ligand Note. Pursuant to the terms of the Loan and Security Agreement and the Ligand Note, the loans will become due and payable upon the written demand of Ligand at any time after the earlier to occur of an event of default under the Loan and Security Agreement or the Ligand Note, or May 21, 2018, unless the loans are repaid in cash or converted into equity prior to such time. In addition, under the Loan and Security Agreement, the Company may not declare or pay dividends in respect of its common stock without Ligand’s prior written consent.  

On May 8, 2017, the Company entered into the Third Amendment to the Loan and Security Agreement (the “Third Loan Amendment”), which: (1) extended the maturity date of the Loans from May 21, 2017 to May 21, 2018, and (2) provided that the Company was required to repay $200,000 of the Ligand Note in the third quarter of 2017, which payment had to be made solely in cash (the “Required Repayment”).  The Company made the Required Repayment on July 13, 2017. The Required Repayment was applied, first, to accrued and unpaid interest on the Loans and, second, to the unpaid principal amount of the Loans. Each $1.00 of value of the Required Repayment reduced the amount of accrued and unpaid interest and then unpaid principal amount on the Loans by $0.50.  As a result of the Third Loan Amendment, the Company recorded a debt modification adjustment of $1.0 million to the debt conversion feature liability primarily due to the longer expected term, offset with an adjustment recorded to the Ligand Note discount.   

13


In connection with the Loan and Security Agreement, the Company also granted Ligand a continuing security interest in all of its right, title and interest in and to its assets as collateral for the full, prompt, complete and final payment and performance when due of all obligations under the Loan and Security Agreement and the Ligand Note.

On May 21, 2018, the Company repaid the entire remaining balance of $3.9 million due on the Ligand Note in cash.  During the three and six months ended June 30, 2018, the Company recorded $14,000 and $38,000 of interest expense, respectively, $146,000 and $404,000 of amortization of debt discount, respectively, and $37,000 and $1.4 million as other income related to the decrease in the fair value of the debt conversion feature liability, respectively.  

During the three and six months ended June 30, 2017, the Company recorded $24,000 and $49,000 of interest expense, respectively, $337,000 and $768,000 of amortization of debt discount, respectively, and $571,000 and $848,000 as other income related to the decrease in the fair value of the debt conversion feature liability, respectively.  

 

5. Stockholders’ Equity

 

Preferred Stock

 

The Company is authorized to issue up to 10,000,000 shares of preferred stock, $0.00001 par value per share, with no shares outstanding as of June 30, 2018 and December 31, 2017. The Board of Directors is authorized to designate the terms and conditions of any preferred stock the Company may issue without further action by the stockholders of the Company.

 

Common Stock

The Company is authorized to issue up to 300,000,000 shares of common stock, $0.00001 par value per share.

In February 2014, the Company entered into a stock purchase agreement with one of its founders. The agreement provided for the purchase of 1,000,000 shares of the Company’s common stock at a price per share of $0.01 in exchange for future services to be rendered to the Company as measured by certain performance criteria. The shares were subject to a repurchase option and were to vest in two tranches of 500,000 shares each, upon achievement of the performance target or upon a triggering event as defined.

The Company determined that the fair value of the unrecognized expense was $168,000 at February 20, 2014, the grant date. In May 2015, the Company repurchased 633,810 of these shares at a purchase price of $0.00001 per share. In connection with the repurchase, the Company entered into an amendment to the stock purchase agreement to provide that the remaining 366,190 shares will continue to vest in two tranches of 183,095 shares each, upon achievement of the performance target or upon a triggering event as defined. The pro rata grant date fair value of the unrecognized expense is $62,000.  In October 2015, a triggering event became probable of occurrence and was deemed achieved in October 2016; therefore, the Company recorded $31,000 of stock-based compensation expense through December 31, 2016.  No similar expense was recognized during the three and six months ended June 30, 2018 and 2017.  The Company will continue to reassess at each reporting period whether it is probable that the performance target will be achieved, and if and when it is deemed probable, the Company will begin to record compensation expense using the fair value to determine stock-based compensation expense in its financial statements over the period the Company estimates the performance target will actually be achieved.

On June 20, 2016, the Company entered into the Equity Distribution Agreement (the “Distribution Agreement”) with Maxim Group LLC (“Maxim”) pursuant to which the Company was able to offer and sell, from time to time, through Maxim up to 3,748,726 shares of its common stock (the “Maxim Offering”).  Effective July 26, 2017, the Distribution Agreement terminated automatically in accordance with the terms thereof.  All shares of common stock offered and sold in the Maxim Offering were issued pursuant to the Company’s shelf registration statement on Form S-3 (File No. 333-212134) filed with the SEC on June 20, 2016, as amended by Amendment No. 1 thereto filed with the SEC on July 26, 2016, and declared effective on July 26, 2016 (the “Shelf Registration Statement”) and the prospectus relating to the Maxim Offering that forms a part of the registration statement on Form S-3.  The registration statement on Form S-3 was declared effective by the SEC on July 26, 2016.  From the inception of the Distribution Agreement through July 26, 2017, the Company sold 1,267,237 shares of its common stock under the Distribution Agreement resulting in net proceeds to the Company of $1.6 million, after deducting the sales agent’s commission.

 

On August 24, 2016, the Company entered into a common stock purchase agreement (the “Purchase Agreement”), pursuant to which Aspire Capital Fund, LLC (“Aspire Capital”) was committed to purchase up to an aggregate of $12.5 million of shares of the Company’s common stock over the 30-month term of the Purchase Agreement. Upon execution of the Purchase Agreement, the Company issued and sold 333,333 shares of common stock (the “Initial Shares”) at a price per share of $1.50, for an aggregate purchase price of $500,000 to Aspire Capital under the Purchase Agreement.  Concurrently with the execution of the Purchase Agreement, and as consideration for Aspire Capital entering into the Purchase Agreement, the Company issued 336,116 shares of common stock as a commitment fee (the “Commitment Shares”) to Aspire Capital with a fair value of $440,000, which has been recorded as deferred financing costs, with a prorated portion charged to additional paid-in-capital for the Initial Shares, with the

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remainder of the costs amortized over the term of the Purchase Agreement as there was no guarantee that additional shares would be sold under the Purchase Agreement.  Pursuant to the terms of the Purchase Agreement, the Company was able to, from time to time and subject to certain limitations, direct Aspire Capital to purchase shares of the Company’s common stock using pricing formulas based on average prevailing market prices around the time of each sale.  Additionally, the Company and Aspire may not effect any sales of shares of the Company's common stock under the Purchase Agreement during the continuance of an event of default or on any trading day that the closing sale price of its common stock is less than $0.40 per share (subject to adjustment for stock dividends, splits, combinations or similar transactions or events).  Effective June 19, 2017, the Company terminated the Purchase Agreement, resulting in a write off of the remaining capitalized deferred financing costs relating to the Purchase Agreement of $337,000.  From the inception of the Purchase Agreement through June 19, 2017, the Company sold 1,476,991 shares of its common stock under the Purchase Agreement resulting in aggregate gross proceeds to the Company of $2.0 million, in addition to the Initial Shares and the Commitment Shares.  

On February 8, 2017, the Company entered into a Stock Purchase Agreement (the “SPA”) with PoC Capital, LLC (“PoC”), pursuant to which, among other things, the Company issued to PoC 1,286,173 shares of its common stock.  Under the terms of the SPA, PoC has agreed to fund $1.8 million in study costs associated with certain clinical studies, including a planned proof-of-concept trial in patients with Glycogen Storage Disease type Ia.  Any study costs in excess of that amount will be the Company’s sole responsibility.  The Company has accounted for the $1.8 million as a prepaid expense on the balance sheet.  During the three and six months ended June 30, 2018, the Company recorded amortization expense of $252,000 and $477,000, respectively, in clinical study costs related to the SPA with PoC. During the three and six months ended June 30, 2017, the Company recorded amortization expense of $357,000 and $400,000, respectively.  The remaining prepaid balance of $329,000 was recorded on the balance sheet as of June 30, 2018.

On June 14, 2017, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with certain accredited investors (the “Purchasers”) pursuant to which the Company sold an aggregate of 3,749,783 shares (the “Shares”) of its common stock in a registered direct offering (the “Registered Direct Offering”).  The Shares were offered by the Company pursuant to the Shelf Registration Statement.  In a concurrent private placement, the Company also agreed, pursuant to the Securities Purchase Agreement, to issue and sell to each of the Purchasers a warrant to purchase 0.75 shares of common stock (the “Warrants”) for each share of common stock purchased by a Purchaser in the Registered Direct Offering (the “Private Placement” and, together with the Registered Direct Offering, the “Offerings”).  The exercise price of the Warrants is $1.30 per share, subject to adjustment as provided therein, and will be exercisable beginning on December 19, 2017 through December 19, 2022.  The combined purchase price for one Share and one Warrant to purchase 0.75 shares of common stock in the Offerings was $1.15. The closing of the Offerings occurred on June 19, 2017. The aggregate net proceeds from the Offerings, after deducting the placement agents’ fees and offering expenses, were $3.9 million. 

 

On September 28, 2017, the Company entered into a purchase agreement (the “Registered Offering Purchase Agreement”) pursuant to which, on September 29, 2017, the Company sold to Lincoln Park Capital Fund, LLC (“LPC”) 701,282 shares of common stock (the “LPC Initial Shares”) at a price of approximately $1.78 per share for an aggregate purchase price of $1.3 million, pursuant to the Shelf Registration Statement and the prospectus supplement thereto dated September 28, 2017.

 

On September 28, 2017, the Company also entered a purchase agreement (the “Commitment Purchase Agreement”) and a registration rights agreement (the “Registration Rights Agreement”) with LPC, pursuant to which the Company has the right to sell to LPC up to $15.0 million in shares of common stock, subject to certain limitations and conditions set forth in the Commitment Purchase Agreement. Upon the satisfaction of the conditions in the Commitment Purchase Agreement (the “Commencement”) the Company will have the right, from time to time at its sole discretion over the 30-month period from and after the Commencement, to direct LPC to purchase up to 75,000 shares of common stock on any business day (subject to certain limitations contained in the Commitment Purchase Agreement), with such amounts increasing based on certain threshold prices set forth in the Commitment Purchase Agreement; however, not to exceed $1.0 million in total purchase proceeds per purchase date. The purchase price of shares of common stock that the Company elects to sell to LPC pursuant to the Commitment Purchase Agreement will be based on the market prices of the common stock at the time of such purchases as set forth in the Commitment Purchase Agreement. In addition to regular purchases, as described above, the Company may also direct LPC to purchase additional amounts as accelerated purchases or as additional purchases if the closing sale price of the common stock is not below certain threshold prices, as set forth in the Commitment Purchase Agreement. In all instances, the Company may not sell shares of its common stock to LPC under the Commitment Purchase Agreement if it would result in LPC beneficially owning more than 4.99% of the Common Stock. As consideration for LPC’s commitment to purchase shares of common stock pursuant to the Commitment Purchase Agreement, the Company issued to LPC 100,000 shares of common stock (the “LPC Commitment Shares”).  From inception of the Commitment Purchase Agreement through December 31, 2017, 343,051 shares were issued pursuant to the Commitment Purchase Agreement resulting in aggregate gross proceeds of $802,000 in addition to the LPC Initial Shares and the LPC Commitment Shares.  No additional shares were issued during the three and six months ended June 30, 2018.

 

On December 11, 2017, the Company closed an underwritten public offering of 5,900,000 shares of its common stock, including 769,565 shares sold pursuant to the underwriters’ full exercise of their option to purchase additional shares to cover over-allotments,

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pursuant to the Shelf Registration Statement at a public offering price of $2.50 per share, for total net proceeds of $13.4 million after deducting underwriting discounts and commissions and other offering expenses.

On February 6, 2018, the Company completed an underwritten public offering of common stock pursuant to the Shelf Registration Statement (the “February 2018 Offering”). In the February 2018 Offering, the Company sold 12,650,000 shares of the Company’s common stock at a public offering price of $5.00 per share of common stock. Upon the closing of the February 2018 Offering on February 6, 2018, the Company received net proceeds of $58.7 million, after deducting underwriting discounts, commissions and other offering expenses.

 

On June 11, 2018, the Company completed an underwritten public offering of common stock (the “June 2018 Offering”) pursuant to the Shelf Registration Statement and a registration statement on Form S-3MEF (File No. 333-225479) filed pursuant to Rule 462(b) of the Securities Act of 1933, as amended.  In the June 2018 Offering, the Company sold 8,625,000 shares of the Company’s common stock at a public offering price of $9.00 per share of common stock. Upon the closing of the June 2018 Offering on June 11, 2018, the Company received net proceeds of $72.3 million, after deducting underwriting discounts, commissions and other offering expenses.

 

During the three months ended June 30, 2018 and 2017, and in accordance with the Company’s 2014 Employee Stock Purchase Plan (the “ESPP”), the Company issued an aggregate of 72,597 and 19,887 shares of its common stock to certain employees, respectively.

 

6. Stock-Based Compensation

In connection with the Company’s initial public offering of common stock (the “IPO”), the Company’s 2014 Equity Incentive Plan (the “2014 Plan”) and the ESPP became effective on April 28, 2015, the date of the execution and delivery of the underwriting agreement for the IPO. A total of 1,527,770 shares of the Company’s common stock were initially reserved for issuance under the 2014 Plan, and 458,331 shares of the Company’s common stock were initially reserved for issuance under the ESPP.  From January 1, 2016 and through June 30, 2018, in accordance with the terms of the 2014 Plan, an additional 2,321,363 shares of the Company’s common stock were added to the number of shares available for issuance under the 2014 Plan, respectively, and, in accordance with the terms of the ESPP, an additional 663,246 shares of the Company’s common stock were added to the number of shares available for issuance under the ESPP, respectively.

The Company generally uses the straight-line method to allocate compensation cost to reporting periods over each optionee’s requisite service period, which is generally the vesting period, and estimates the fair value of stock-based awards or restricted stock units to employees and directors using the Black-Scholes option-valuation model. The Black-Scholes model requires the input of subjective assumptions, including volatility, the expected term and the fair value of the underlying common stock on the date of grant, among other inputs. Stock options granted to non-employees are accounted for using the fair value approach. Stock options granted to non-employees are subject to periodic revaluation over their vesting terms.

2014 Plan. The 2014 Plan provides that the compensation committee of the Company’s Board of Directors (the “Compensation Committee”) may grant or issue stock options, stock appreciation rights, restricted shares, restricted stock units and unrestricted shares, deferred share units, performance and cash-settled awards and dividend equivalent rights to participants under the 2014 Plan. Initially, a total of 1,527,770 shares of the Company’s common stock were reserved for issuance pursuant to the 2014 Plan, which number is also the limit on shares of common stock available for awards of incentive stock options. The number of shares available for issuance under the 2014 Plan will, unless otherwise determined by the Company’s Board of Directors or the Compensation Committee, be automatically increased on January 1st of each year commencing on January 1, 2016 and ending on (and including) January 1, 2024, in an amount equal to 3.5% of the total number of shares of the Company’s common stock outstanding on December 31st of the preceding calendar year. The shares of common stock deliverable pursuant to awards under the 2014 Plan are authorized but unissued shares of the Company’s common stock, or shares of the Company’s common stock that the Company otherwise holds in treasury or in trust. Any shares of the Company’s common stock underlying awards that are settled in cash or otherwise expire, or are forfeited, terminated or cancelled (including pursuant to an exchange program established by the Compensation Committee) prior to the issuance of stock will again be available for issuance under the 2014 Plan. In addition, shares of the Company’s common stock that are withheld (or not issued) in payment of the exercise price or taxes relating to an award, and shares of the Company’s common stock equal to the number surrendered in payment of any exercise price or withholding taxes relating to an award, will again be available for issuance under the 2014 Plan.

ESPP. Initially, a total of 458,331 shares of the Company’s common stock were reserved for issuance pursuant to the ESPP. The number of shares available for issuance under the ESPP will, unless otherwise determined by the Company’s Board of Directors or the Compensation Committee, be automatically increased on January 1st of each year commencing on January 1, 2016 and ending on (and including) January 1, 2024, in an amount equal to 1% of the total number of shares of the Company’s common stock outstanding on December 31st of the preceding calendar year. The shares of common stock available for purchase pursuant to the ESPP are authorized but unissued shares of the Company’s common stock, shares of the Company’s common stock that the Company otherwise holds in treasury or shares of the Company’s common stock that were purchased on the open market in arms’ length transactions in

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accordance with applicable securities laws. Shares of the Company’s common stock will be offered for purchase under the ESPP as determined by the Compensation Committee through a series of successive offerings that each have a term of 24 months and consist of four consecutive purchase periods of six months each. Prior to the commencement of any future offering under the ESPP, the Compensation Committee may determine that the current offering shall end, may commence a new offering on the first day after the end of such terminal purchase period (or any desired later date), and may decide that future offerings will consist of one or more consecutive purchase periods, each to be of such duration as determined by the Compensation Committee; however, no offering will exceed 27 months and no purchase period will exceed one year. Each employee of the Company who (1) is an employee on the first date of any offering under the ESPP, (2) is customarily scheduled to work for more than 20 hours per week and more than five months per calendar year, and (3) meets such other criteria as may be determined by the Compensation Committee (consistent with Section 423 of the Internal Revenue Code of 1986, as amended), is eligible to participate in the ESPP for each purchase period within such offering. The purchase price per share of the Company’s common stock under the ESPP may not be less than, and will initially be equal to, the lesser of: (1) 85% of the fair market value per share of the Company’s common stock on the first day of the offering, or (2) 85% of the fair market value per share of the Company’s common stock on the date the purchase right is exercised, which will be the last day of the applicable purchase period.

 

During the three and six months ended June 30, 2018 and 2017, the Company recognized the following stock-based compensation expense (in thousands):

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,