| Summary of Significant Accounting Policies | 2. Summary of Significant Accounting Policies Use of Estimates The accompanying financial statements have been prepared in accordance with U.S. GAAP. The preparation of financial statements in conformity with U.S. GAAP requires management to make judgments, assumptions and estimates that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent liabilities. On an ongoing basis, management evaluates its estimates, including those related to net product revenue, clinical trial accruals, fair value of derivative and warrant liabilities, common stock and stock-based awards and income taxes. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from those estimates. Fair Value of Financial Instruments The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, trade and contract receivables, prepaid and other current assets, accounts payable, accrued liabilities, and other current liabilities approximate fair value due to their short-term maturities. Short-term investments consist of available-for-sale securities and are carried at fair value. Based upon the borrowing rates currently available to the Company for loans with similar terms, the Company believes the carrying amount of the loan payable approximates its fair value. The warrant and derivative liabilities are recorded at estimated fair value with changes in estimated fair value recorded in the Company's statements of operations. Cash and Cash Equivalents Cash equivalents include only securities having a maturity of three months or less at the time of purchase. As of September 30, 2018 and December 31, 2017, cash and cash equivalents consisted of bank deposits, cash, commercial paper, money market funds, cash repurchase agreement investments and overnight cash sweep investments in government money market funds. Short-term Investments Short-term investments consist of debt securities with maturities greater than three months, but less than one year from the date of acquisition, and are classified as available for sale. Short-term investments are carried at fair value. Unrealized gains and losses on available-for-sale debt securities are excluded from earnings and reported as a component of net unrealized (loss) on available-for-sale securities in the Company's consolidated statements of comprehensive loss. The amortized cost of debt securities reflects amortization of purchase premiums and accretion of purchase discounts to date, which are included in net other income. The Company reviews all of its marketable securities on a regular basis to evaluate whether any security has experienced an other-than-temporary decline in fair value. Trade and Contract Receivables, net Trade accounts receivable consist of payments to be received from customers for sales of ZEMDRI recorded net of prompt-payment discounts, incentive fees, chargebacks, and doubtful accounts. Estimates for chargebacks, prompt-payment discounts and incentive fees are based on contractual terms, historical trends and expectations regarding the utilization rates for these programs. Contract accounts receivable consist of payments to be received from U.S. government contracts. Restricted Cash At September 30, 2018 and December 31, 2017, the Company had restricted cash of $6.6 million and $9.7 million, respectively. The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheet that sum to the total of the same such amounts shown in the condensed consolidated balance sheets (in thousands):
September 30, 2018
December 31, 2017
Cash and cash equivalents
$
55,635
$
145,219
Restricted cash, current
328
5,891
Restricted cash, non-current
6,267
3,855
Total cash, cash equivalents, and restricted cash
$
62,230
$
154,965
In May 2017, the Company received $13.2 million of funding from the Gates Foundation from the Grant Funds and Gates Investment (see Note 1). The Letter Agreement restricts the Company’s use to expenditures that are reasonably attributable to the activities required to support the research projects funded by the Gates Foundation, including an allocation of overhead and administrative expenses. As of September 30, 2018 and December 31, 2017, the Company had $6.1 million and $9.2 million, respectively, of restricted cash related to the cash provided by the Gates Foundation. As of September 30, 2018 and December 31, 2017, the Company had $0.5 million of restricted cash, which relates to the Company’s facility leases. Other Long-Term Assets Other long-term assets consist of deferred manufacturing costs related to clinical research or production of ZEMDRI. These costs are amortized over the life of the respective contract. Segment Reporting Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker regarding resource allocation and assessing performance. The Company has one operating segment. Customer Concentration For the three and nine-month periods ended September 30, 2018 and 2017, the Company’s revenue was generated from product revenues, funding pursuant to U.S. government contracts and a non-profit foundation grant. All trade and contract receivables relate to sales from product revenue and funding from U.S. government contracts. As of and for the year ended December 31, 2017 all of the Company’s revenue and contract receivable balance was represented by funding from U.S. government contracts and a non-profit foundation grant. Concentration of Credit Risk Financial instruments that potentially subject the Company to a significant concentration of credit risk consist of cash, cash equivalents and short-term investments. Cash and cash equivalents are deposited in checking, overnight sweep and money market accounts at one financial institution with balances that generally exceed federally insured limits. Management believes that the financial institution is financially sound, and, accordingly, minimal credit risk exists with respect to this financial institution. The Company’s investment policy limits investments to certain types of debt securities issued by the U.S. government, its agencies and institutions with investment-grade credit ratings and places restrictions on maturities and concentration by type and issuer. The Company is exposed to credit risk in the event of default by the institutions holding its cash and cash equivalents or issuing the debt securities. As of September 30, 2018 and December 31, 2017, the Company had not experienced any credit losses in such accounts or investments. Inventory Inventory is stated at the lower of cost and net realizable value with costs determined under the first-in, first-out (FIFO) cost method and consists of raw materials, work-in-process and finished goods. Costs capitalized as inventory include third party manufacturing costs, associated compensation-related costs of personnel indirectly involved in the manufacturing process and other overhead costs. The Company uses standard costs to determine its cost basis for inventory, which approximates actual costs. Standard costs are reviewed and updated annually or as needed. The inventory capitalization process began to be applied to ZEMDRI upon FDA approval on June 25, 2018. Prior to regulatory approval of ZEMDRI, the Company incurred expenses related to the manufacturing of the product and recorded all such costs as research and development expenses. Beginning on June 25, 2018, the Company began to capitalize inventory costs associated with ZEMDRI when it was determined that the inventory had a probable future economic benefit and the related costs were expected to be realized through commercialization of ZEMDRI. If information becomes available that suggests that inventories may not be realizable, the Company may be required to expense a portion or all of its previously capitalized inventory. The Company periodically analyzes its inventory levels, and evaluates for potential excess inventory by analyzing current and future product demand relative to the remaining product shelf life. The Company builds demand forecasts by considering factors such as, but not limited to, overall market potential, market share, market acceptance and patient usage. Revenue Recognition Product Revenue, Net For revenue recognized as product revenue, the Company adopted the Accounting Standards Update (“ASU”) No 2014-09, Revenue from Contracts with Customers (“ASC 606”) at the time of its first commercial sale of ZEMDRI in the third quarter of 2018. Pursuant to ASC 606, the Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that it will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract, determines those that are performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes revenue in the amount of the transaction price that is allocated to the respective performance obligation when the performance obligation is satisfied. The Company’s product revenue consists of the sales of ZEMDRI, which the Company began shipping to customers in July 2018. Prior to July 2018, the Company had no product revenues. The Company sells ZEMDRI to specialty distributors and physician-owned infusion centers in the United States. These customers subsequently resell the Company’s product to hospitals, medical centers, or patients. In addition to these distributions and purchasing agreements, the Company enters into arrangements with health care providers and payors that provide government mandated or negotiated rebates, chargebacks, and discounts with respect to the purchase of the Company’s product. Revenue is recognized on product sales when the customer obtains control of the Company’s product, which occurs at a point in time (upon delivery). Product revenues are recorded net of applicable reserves for variable consideration, including discounts and allowances, chargebacks and government rebates. The Company expenses incremental costs of obtaining a contract when incurred, if the expected amortization period of the asset that the Company would have recognized is one year or less. To date, the Company has not incurred such costs. Reserves for Variable Consideration Revenues from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established and which result from discounts, returns, chargebacks, rebates, and other allowances that are offered within contracts between the Company and its customers, payors and other indirect customers relating to product sales. These reserves as detailed below are based on the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable (if the amount is payable to the customer) or a current liability (if the amount is payable to a party other than a customer). Where appropriate, these estimates take into consideration a range of possible outcomes that are probability-weighted in accordance with the expected value method under ASC 606 for relevant factors. These factors include current contractual and statutory requirements, specific known market events and trends, industry data, and/or forecasted customer buying and payment patterns. Overall, these reserves reflect the Company’s best estimates of the amount of consideration to which the Company is entitled based on the terms of the respective underlying contracts. The amount of variable consideration that is included in the transaction price may be constrained and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration ultimately received may differ from estimates. If actual results in the future vary from our estimates, the Company will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known. Trade Discounts and Allowances: The Company generally provides customers with discounts which include incentive fees and other considerations, including prompt-pay discounts, service fees, and other contract fees that are explicitly stated in contracts. These reserves are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue and receivables or recording of accrued liabilities. In addition, the Company compensates its customers for sales order management, data, administrative, and distribution services. However, the Company has determined such services received to date are not distinct from the sale of products to the customer and therefore a fair market value for these services may not be reasonably determined. Therefore, these payments have been recorded as a reduction of revenue within the condensed consolidated statement of operations for the three and nine-months ended September 30, 2018. Product Returns: The Company’s standard return policy offers customers a right of return for shipping errors or product damage. The Company estimates the amount of product sales that may be returned by customers and records this estimate as a reduction of revenue in the period the related product revenue is recognized. The Company currently estimates product return liabilities using available industry data, sales information and visibility into the inventory remaining in the distribution channel. Chargebacks: Chargebacks are discounts that occur when qualified healthcare providers purchase directly from the Company’s specialty distributors at a discounted price. The specialty distributors, in turn, charge the Company the difference between the price initially paid by the wholesaler and the discounted price paid to the wholesaler by the healthcare providers or government entities. These reserves are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue and receivables. Chargeback amounts are generally determined at the time of resale to the qualified healthcare provider by customers, and the Company generally issues credits for such amounts shortly after the chargeback has been processed and approved. Reserves for chargebacks consist of amounts that the Company expects to issue for units that remain in the distribution channel at each reporting period end and chargebacks that customers have claimed but for which the Company have not yet issued a credit. Government Rebates: Based on established reimbursement arrangements under the Medicaid and Medicare programs, the Company is obliged to make payment of rebates with respect to utilization of the Company’s product by qualified customers. The Company estimates these rebates and records such estimates in the same period the related revenue is recognized, resulting in a reduction of product revenue and recording of accrued liabilities. The Company’s liability for these rebates consists of invoices received for claims that have not been paid or for which an invoice has not yet been received, estimates of claims for the current quarter, and estimates of future claims that will be made for product that has been recognized as revenue, but which remains in the distribution channel at the end of each reporting period. The Company will continue to assess its estimates of variable consideration as it accumulates additional historical data and will adjust these estimates accordingly. Contract Revenue For revenue recognized as contract revenue, the Company evaluated Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers Funds received from third parties under contract or grant arrangements are recorded as revenue if the Company is deemed to be the principal participant in the arrangements because the activities under the contracts or grants are part of the Company’s development programs. If the Company is not the principal participant, the funds from contracts or grants are recorded as a reduction to research and development expense. Contract funds received are not refundable and are recognized when the related qualified research and development costs are incurred and there is reasonable assurance that the funds will be received. Funds received in advance are recorded as deferred revenue. Management has determined that the Company is the principal participant under the Company’s government contract arrangements and non-profit grant agreement, and accordingly, the Company records amounts earned under these arrangements as revenue. Cost of Sales Cost of sales represents primarily the costs associated with manufacturing ZEMDRI and ZEMDRI net sales-based royalties. Research and Development Costs Research and development costs are expensed as incurred. Research and development expenses include certain payroll and personnel expenses, laboratory supplies, consulting costs, external contract research and development expenses, and allocated overhead, including rent, equipment depreciation, and utilities and relate to both Company-sponsored programs as well as costs incurred pursuant to collaboration agreements, non-profit grants and government contracts. Nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities are deferred and recognized as an expense as the goods are delivered or the related services are performed. For certain research and development services where the Company has not yet been invoiced or otherwise notified of actual cost from the third-party contracted service providers, the Company is required to estimate the extent of the services that have been performed on the Company’s behalf and the associated costs incurred at each reporting period. The majority of the service providers invoice the Company monthly in arrears for services performed. The Company makes estimates of the accrued expenses as of each balance sheet date in the consolidated financial statements based on facts and circumstances known to the Company at that time. The Company periodically confirms the accuracy of the estimates with the service providers and makes adjustments if necessary. Examples of estimated accrued research and development expenses include services from:
•
contract research organizations (“CROs”) and other service providers in connection with clinical studies;
•
contract manufacturers in connection with the production of clinical trial materials; and
•
vendors in connection with preclinical development activities. The Company bases the expenses related to preclinical studies and clinical trials on estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and CROs that conduct and manage such studies and trials on the Company’s behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract, and may result in uneven payment flows and expense recognition. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In accruing service fees, the Company estimates the time period over which these services will be performed and the level of effort to be expended and costs to be incurred during each reporting period. If the actual timing of the performance of services or the level of effort varies from the estimate, the Company adjusts the accrual accordingly. The Company’s estimation of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting changes in estimates in any particular period. To date, there have been no material adjustments from the Company’s estimates to the amount actually incurred. Property and Equipment, Net Property and equipment consist of office equipment, laboratory equipment, and leasehold improvements and are stated at cost, less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets, generally three to seven years. Leasehold improvements are amortized over their estimated useful lives or the remaining lease term, whichever is shorter. Maintenance and repair costs are recorded as a component of operating expenses in the Company’s consolidated statement of operations when incurred. Impairment of Long-Lived Assets The Company reviews long-lived assets, including property and equipment, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. If indicators of impairment exist, an impairment loss would be recognized when the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. The impairment charge is determined based upon the excess of the carrying value of the asset over its estimated fair value, with estimated fair value determined based upon an estimate of discounted future cash flows or other appropriate measures of estimated fair value. As of December 31, 2017, the Company did not have any impairment charges. During the three months ended September 30, 2018, the Company identified an impairment charge related to long-lived assets which the Company ceased use of in connection with the restructuring effected in July 2018 (see Note 4). Warrant Liability On June 3, 2016, the Company issued warrants to purchase 1,999,999 shares of its common stock pursuant to a Securities Purchase Agreement (the “Purchase Agreement”) in connection with a private placement financing transaction (the “Private Placement”). Each warrant has an exercise price of $3.66 per share and is exercisable for five years from the date of issuance. The Company accounts for these warrants as a liability instrument measured at estimated fair value. The initial fair value of the warrants was determined using a calibration model that involved using the Black-Scholes Pricing Model ("Black-Scholes"), which requires inputs such as the risk-free interest rate, expected share price volatility, underlying price per share of the Company's common stock and remaining term of the warrants. The warrants are subject to remeasurement at each balance sheet date, using Black-Scholes, with any changes in the fair value of the outstanding warrants recognized in the condensed consolidated statements of operations. As of September 30, 2018, a warrant to purchase 1,178,782 shares of the Company’s common stock remains outstanding and unexercised. Contingently Redeemable Common Stock In May 2017, the Company agreed to sell 407,331 shares of its contingently redeemable common stock to the Gates Foundation in a private placement at a purchase price per share equal to $24.55 (see Note 1). Common stock with embedded redemption features that are settled at the option of the holder, are considered redeemable common stock. Redeemable common stock is considered to be temporary equity and presented in a section between liabilities and equity on the Company’s consolidated balance sheets. Subsequent adjustment of the amount presented in temporary equity is required only if the Company determines that it is probable that the instrument will become redeemable. Upon termination of the redemption features, the redeemable common stock is reclassified into equity. As of September 30, 2018, 407,331 shares of contingently redeemable common stock remain as temporary equity. Recent Accounting Pronouncements In February 2016, the FASB issued ASU No. 2016-02, Leases In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments- Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities In March 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740), Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 . The amendments add various Securities and Exchange Commission (“SEC) paragraphs pursuant to the issuance of SEC Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“Act”) (“SAB 118”). The SEC issued SAB 118 to address concerns about reporting entities’ ability to timely comply with the accounting requirements to recognize all of the effects of the Act in the period of enactment. SAB 118 allows disclosure that timely determination of some or all of the income tax effects from the Act are incomplete by the due date of the financial statements and if possible to provide a reasonable estimate. The Company has provided a reasonable estimate in the notes to the consolidated financial statements. Net Loss Per Share Basic net loss per common share is computed by dividing the net loss by the weighted-average number of common shares outstanding during the period. Diluted net loss per common share is computed by dividing the net loss by the weighted-average number of common shares and dilutive common share equivalents outstanding during the period. For purposes of this calculation, preferred stock, stock options, restricted stock units and warrants are considered to be common stock equivalents and are only included in the calculation of diluted net loss per share when their effect is dilutive.
Three Months Ended September 30,
Nine Months Ended September 30,
2018
2017
2018
2017
Numerator:
Net loss used to compute basic net loss per share
$
(41,791
)
$
(29,907
)
$
(138,990
)
$
(89,235
)
Less: Gain on private placement warrants
(4,877
)
(6,795
)
(7,173
)
-
Net loss used to compute diluted net loss per share
$
(46,668
)
$
(36,702
)
$
(146,163
)
$
(89,235
)
Denominator:
Weighted-average shares used to compute basic net loss per share
45,329,711
42,259,001
44,854,279
38,709,811
Add: Private placement warrant shares
464,975
952,058
741,559
-
Weighted-average shares used to compute diluted net loss per share
45,794,686
43,211,059
45,595,838
38,709,811
Net loss per share:
Basic
$
(0.92
)
$
(0.71
)
$
(3.10
)
$
(2.31
)
Diluted
$
(1.02
)
$
(0.85
)
$
(3.21
)
$
(2.31
) For the three and nine-month periods ended September 30, 2018 and 2017, potentially dilutive securities outstanding have been excluded from the computations of diluted weighted-average shares outstanding because such securities have an antidilutive impact due to losses reported. The following potentially dilutive securities have been excluded from diluted net loss per share, because their effect would be antidilutive, as of September 30, 2018 and 2017:
Three Months Ended September 30,
Nine Months Ended September 30,
2018
2017
2018
2017
Shares subject to options to purchase common stock
5,811,627
4,793,775
5,811,627
4,793,775
Restricted stock units
1,591,663
845,705
1,591,663
845,705
Shares subject to warrants to purchase common stock
17,514
17,514
17,514
1,196,296 |
