| Summary of Significant Accounting Policies | 2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with GAAP
requires us to make certain estimates and assumptions that affect
the amounts reported in the condensed consolidated financial
statements and accompanying notes. Actual results could differ
materially from those estimates and assumptions.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly-liquid
investments with original maturities of three months or less when
acquired and are stated at cost, which approximates market
value.
Restricted Cash
Restricted cash relates to amounts reserved for various clinical
trial obligations and lease arrangements.
Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell
an asset or be paid to transfer a liability in an orderly
transaction between market participants on the measurement date.
Accounting guidance establishes a fair value hierarchy that
requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value.
The standard describes three levels of inputs that may be used to
measure fair value:
Level 1—Quoted prices in active markets for identical assets
or liabilities. Our Level 1 assets consisted of money market funds
for the periods presented. We had no Level 1 liabilities for any
period presented.
Level 2—Observable inputs other than Level 1 prices,
such as quoted prices for similar assets or liabilities, quoted
prices in markets with insufficient volume or infrequent
transactions (less active markets), or model-derived valuations in
which all significant inputs are observable or can be derived
principally from or corroborated with observable market data for
substantially the full term of the assets or liabilities. We had no
Level 2 assets or liabilities for any period presented.
Level 3—Unobservable inputs to the valuation methodology
that are significant to the measurement of the fair value of assets
or liabilities. Historically, our Level 3 liabilities consisted of
future purchase rights liabilities. We had no Level 3 assets or
liabilities as of June 30, 2015 or December 31, 2014. We
estimated the fair value of the future purchase rights using a
binomial lattice model depending on the underlying attributes of
the future purchase rights, as applicable. See “Future
Purchase Rights Liabilities” below.
The Company recognizes transfers into and out of levels within the
fair value hierarchy at the end of the reporting period in which
the actual event or change in circumstances that caused the
transfer occurs.
The carrying value of cash and cash equivalents, restricted cash,
other current assets and prepaid expenses, accounts payable, and
accrued expenses approximates fair value due to the short period of
time to maturity.
Property and Equipment, Depreciation and
Amortization
Property and equipment are recorded at cost and depreciated using
the straight-line method over the estimated useful lives of the
assets (generally three to five years). Leasehold improvements are
stated at cost and amortized on a straight-line basis over the
lesser of the remaining term of the related lease or the estimated
useful lives of the assets. Construction in progress is not
depreciated until the underlying asset is available to be placed in
service. Repairs and maintenance costs are charged to expense as
incurred.
Impairment of Long-Lived Assets
Long-lived assets consist primarily of property and equipment. An
impairment loss is recorded if and when events and circumstances
indicate that assets might be impaired and the undiscounted cash
flows estimated to be generated by those assets are less than the
carrying amount of those assets. While our current and historical
operating losses and negative cash flows are indicators of
impairment, we believe that our expected future cash flows to be
received support the carrying value of our long-lived assets and,
accordingly, have not recognized any impairment losses through
June 30, 2015.
Future Purchase Rights Liabilities
In September 2012, we entered into a senior preferred stock
purchase agreement pursuant to which we granted the investors the
right to purchase additional shares of senior preferred stock.
These future purchase rights liabilities were initially recorded at
their estimated fair value on the date of issuance as a discount on
the underlying preferred stock and were re-measured to reflect
changes in the estimated fair value at each reporting date, with
any decrease or increase in the estimated fair value being recorded
as other income or expense, respectively. The fair value of these
liabilities was estimated using a binomial lattice model that was
based on the characteristics of the common and preferred stock on
the valuation date, probabilities related to our operations and
clinical development, as well as assumptions for volatility,
remaining expected life, risk-free interest rate and, in some
cases, credit spread. Changes in the fair value of the future
purchase rights liabilities fluctuated in conjunction with
increases or decreases in the implied fair value of our common
stock, and the number of preferred and common shares and future
purchase rights outstanding relative to our enterprise value at
each reporting date. In April 2014, the remaining future purchase
rights terminated upon the conversion of all senior preferred stock
to common stock in conjunction with our initial public offering, or
IPO, with the remaining balance of the future purchase rights
liabilities recorded as other income in our statement of operations
for the applicable period.
Research and Development
Research and development costs consist primarily of
employee-related expenses, contractors, clinical trial sites and
contract research organizations engaged in the development of the
ELAD System, investigation of the mechanism of action of the ELAD
System, expenses associated with obtaining regulatory approvals,
and the cost of acquiring and manufacturing clinical trial
materials. All research and development costs are expensed as
incurred.
Stock-Based Compensation
We measure and recognize compensation expense for all stock-based
payments made to employees and directors based on estimated fair
value, net of an estimated forfeiture rate, and to consultants
based on estimated fair value. Currently, our stock-based awards
consist only of stock options; however, future grants under our
equity compensation plans may consist of shares of restricted stock
and restricted stock units. We estimate the fair value of stock
options granted using the Black-Scholes-Merton, or BSM, option
pricing model, which requires the use of estimates to value
employee stock-based compensation at the date of grant.
We recognize stock-based compensation cost for employees and
directors on a straight-line basis over the requisite service
period of the award. Stock-based compensation expense is recognized
only for those awards that are ultimately expected to vest. We
estimate forfeitures based on an analysis of our historical
employee turnover and will continue to evaluate the appropriateness
of the forfeiture rate based on actual forfeiture experience,
analysis of employee turnover and other factors. We will revise the
forfeiture estimate, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. Changes in forfeiture
estimates, which have not been material to date, impact
compensation cost in the period in which the change in estimate
occurs.
The fair value of options granted to consultants is estimated using
the BSM option pricing model and is re-measured at each reporting
date with changes in fair value recognized as expense in the
consolidated statements of operations.
The BSM option pricing model requires the input of highly
subjective assumptions, including the risk-free interest rate, the
expected dividend yield of our common stock, the expected
volatility of the price of our common stock, and the expected term
of the option. These estimates involve inherent uncertainties and
the application of management’s judgment. If factors change
and different assumptions are used, our stock-based compensation
expense could be materially different in the future. These
assumptions are estimated as follows:
Risk-free Interest Rate
We base the risk-free interest rate assumption on zero-coupon U.S.
treasury instruments appropriate for the expected term of the stock
option grants.
Expected Dividend Yield
We base the expected dividend yield assumption on the fact that we
have never paid cash dividends and have no present intention to pay
cash dividends. Consequently, we used an expected dividend yield of
zero.
Expected Volatility
The expected stock price volatility for our common stock is
estimated based on volatilities of a peer group of similar
publicly-traded, biotechnology companies by taking the average
historic price volatility for the peers for a period equivalent to
the expected term of the stock option grants. We do not use our
average historic price volatility as we have only been a
publicly-traded company since April 2014.
Expected Term
The expected term represents the period of time that options are
expected to be outstanding. As we do not have sufficient historical
experience for determining the expected term of the stock option
awards granted we have determined the expected life assumption
using either the simplified method, which is an average of the
contractual term of the option and its ordinary vesting period, or
the comparable average expected term utilizing those companies in
the peer group as noted above.
Common Stock Valuation
Due to the absence of a public market trading our common stock
prior to the completion of our IPO in April 2014, it was necessary
to estimate the fair value of the common stock underlying our
stock-based awards when performing fair value calculations using
the BSM option pricing model. The fair value of the common stock
underlying our stock-based awards was assessed by our board of
directors. All options to purchase shares of our common stock have
been granted with an exercise price per share no less than the fair
value per share of our common stock underlying those options on the
date of grant.
In the absence of a public trading market for our common stock, we
determined the estimated fair value of our common stock using
methodologies, approaches, and assumptions consistent with the
American Institute of Certified Public Accountants Audit and
Accounting Practice Aid Series: Valuation of Privately Held
Company Equity Securities Issued as Compensation
Leases
We lease all of our office space and enter into various other
operating lease agreements in conducting our business. At the
inception of each lease, we evaluate the lease agreement to
determine whether the lease is an operating or capital lease. Some
of our lease agreements may contain renewal options, tenant
improvement allowances, rent holidays or rent escalation clauses.
When such items are included in a lease agreement, we record a
deferred rent asset or liability equal to the difference between
the rent expense and future minimum lease payments due. The rent
expense related to operating leases is recognized on a
straight-line basis in the statements of operations over the term
of the each lease. In cases where our lessor grants us leasehold
improvement allowances that reduce our rent expense, we capitalize
the improvements as incurred and recognize deferred rent, which is
amortized over the shorter of the lease term or the expected useful
life of the improvements.
Comprehensive Loss
Comprehensive loss is defined as the change in equity during a
period from transactions and other events and circumstances from
non-owner sources and has been reflected as a separate component of
stockholders’ equity in the accompanying condensed
consolidated balance sheets.
Foreign Currency Translation and Transactions
The functional currency of each of our subsidiaries in the United
Kingdom (currently inactive) and China is the local currency.
Assets and liabilities of the subsidiaries are translated at the
rate of exchange at the balance sheet date. Expenses are translated
at the average rate of exchange rates in effect during the
reporting period. Gains and losses resulting from foreign currency
translation are included in accumulated other comprehensive loss in
the accompanying condensed consolidated balance sheets. Gains and
losses resulting from foreign currency transactions are included in
the results of operations, which to date, have not been
significant.
Income Taxes
We account for income taxes under the asset and liability method,
which requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that
have been included in the condensed consolidated financial
statements. Under this method, deferred tax assets and liabilities
are determined on the basis of the differences between the
financial statements and tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the differences
are expected to reverse. The effect of a change in tax rates on
deferred tax assets and liabilities is recognized in income in the
period that includes the enactment date.
We recognize net deferred tax assets to the extent we believe these
assets are more likely than not to be realized. In making such a
determination, management considers all available positive and
negative evidence, including future reversals of existing taxable
temporary differences, projected future taxable income,
tax-planning strategies, and results of recent operations. If
management determines that we would be able to realize our deferred
tax assets in the future in excess of their net recorded amount,
management would make an adjustment to the deferred tax asset
valuation allowance, which would reduce the provision for income
taxes. As of June 30, 2015 and December 31, 2014, we
maintained a full valuation allowance against our entire balance of
deferred tax assets.
We record uncertain tax positions in accordance with Accounting
Standards Codification, or ASC, 740 on the basis of a two-step
process whereby (1) management determines whether it is more
likely than not that the tax positions will be sustained on the
basis of the technical merits of the position and (2) for
those tax positions that meet the more-likely-than-not recognition
threshold, management recognizes the largest amount of tax benefit
that is more than 50 percent likely to be realized upon ultimate
settlement with the related tax authority. We recognize interest
and penalties related to unrecognized tax benefits, if any, within
income tax expense and any accrued interest and penalties are
included within the related tax liability line.
Net Loss Per Share
Basic net loss per share attributable to common stockholders 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. Excluded from the weighted-average number of shares
outstanding are shares that have been issued upon the early
exercise of stock options and are subject to future vesting, which
was a total of 14,087 and 34,801 shares as of June 30, 2015
and 2014, respectively. Diluted net loss per share attributable to
common stockholders 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. Common stock equivalents are
comprised of redeemable convertible preferred stock, warrants for
the purchase of common stock, and options outstanding under our
stock option plan. For all periods presented, there is no
difference in the number of shares used to calculate basic and
diluted shares outstanding due to our net loss position.
Potentially dilutive securities not included in the calculation of
diluted net loss per share attributable to common stockholders
because to do so would be anti-dilutive are as follows:
As of June 30,
2015 2014
Options to purchase common stock 3,258,417 3,174,470
Warrants to purchase common stock 250,646 250,646
Recently Issued Accounting Standards
In August 2014, the Financial Accounting Standards Board, or FASB,
issued Accounting Standards Update, or ASU, No. 2014-15,
“ Presentation of Financial Statements—Going Concern
(Subtopic 205-40): Disclosure of Uncertainties about an
Entity’s Ability to Continue as a Going Concern, |
