| Summary of Significant Accounting Policies | (2) Summary of Significant Accounting Policies Segment Information Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company views its operations and manages its business in one operating segment, which is the business of developing and commercializing its proprietary chemistry technology to create novel antibiotics for serious and life-threatening infections, including multidrug-resistant infections. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles (”GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures. On an ongoing basis, the Company’s management evaluates its estimates, including product revenue, inventory, estimates related to clinical trial accruals, stock-based compensation expense, contract and grant revenues, and going concern considerations. The Company bases its estimates on historical experience and other market-specific or other relevant assumptions that it believes to be reasonable under the circumstances. Actual results may differ from those estimates or assumptions. Concentrations of Credit Risk and Off-Balance Sheet Risk Financial instruments that potentially subject the Company to concentrations of credit risk are primarily cash, cash equivalents and restricted cash. The Company maintains its cash and cash equivalent balances in the form of cash and money market accounts with financial institutions that management believes are creditworthy. The Company’s investment policy includes guidelines on the quality of the institutions and financial instruments and defines allowable investments that the Company believes minimize its exposure to concentration of credit risk. The Company has no financial instruments with off-balance-sheet risk of loss. The Company is also subject to credit risk on its accounts receivable, including from its trade customer receivables and contract receivables from CUBRC Inc. (“CUBRC”), an independent, not-for-profit, research corporation that specializes in U.S. government-based contracts, and the Combating Antibiotic Resistant Bacteria Biopharmaceutical Accelerator, or CARB-X, an international public-private partnership focused on advancing new antimicrobial products to address the threat of antibiotic resistance. The company has a strong track record of collection on its accounts receivable from both CUBRC and CARB-X. The Company’s trade receivables from product sales have payment terms ranging from 30 to 60 days. The Company has evaluated the creditworthiness of its customers and has determined each of them to be creditworthy. The Company has not experienced any trade receivable losses to date. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. 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. Cash and cash equivalents at December 31, 2018 and 2017 consisted of cash and money market funds. Fair Value Measurements The Company’s financial instruments consist principally of cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities. 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. Financial instruments measured at fair value as of December 31, 2018 and 2017 are classified below based on the three fair value hierarchy tiers described above (in thousands):
Fair Value Measurements at Reporting Date Using
Balance
Level 1
Level 2
Level 3
December 31, 2018
Cash and money market funds
$
107,776
$
107,776
$
—
$
—
December 31, 2017
Cash and money market funds
$
136,411
$
136,411
$
—
$
—
The Company measures cash equivalents at fair value on a recurring basis. The fair value of cash equivalents is determined based on “Level 1” inputs, which consist of quoted prices in active markets for identical assets. Accounts Receivable Accounts receivable at December 31, 2018 and 2017 represent amounts due from two main sources: (1) Trade accounts receivable of $0.1 million consisting of payments to be received from customers for sales of Xerava, net of prompt payment discounts, chargebacks, rebates and certain fees and (2) contract accounts receivable of $2.2 million related to the Company’s government-related agreements. Contract accounts receivable relate to payments from entities administering the Company’s government-related agreements which include unbilled contract accounts receivable of $0.7 million and $2.4 million at December 31, 2018 and 2017, respectively. Contract Balances The Company recognizes a contract asset when the Company transfers goods or services to a customer before the customer pays consideration or before payment is due, excluding any amounts presented as a receivable (i.e. accounts receivable). A contract asset represents the Company’s right to consideration in exchange for goods or services that the Company has transferred to a customer. As of December 31, 2018, such contract assets were $3.0 million in relation to milestone payments to be received under the terms of the Everest Medicines License Agreement. For the twelve-month period ended December 31, 2018, the Company recognized license revenue included in such contract assets of $3.0 million. See Note 3 for further details. Inventory Inventory is stated at the lower of cost or net realizable value on a first-in, first-out (FIFO) basis. Prior to the regulatory approval of Xerava, given the uncertainty of approval, the Company recognized as research and development expense costs related to the manufacture of Xerava. Upon approval of Xerava, the Company began to capitalize such costs as inventory. During each quarter, the Company performs an assessment quantifying any potential excess or obsolete inventory and writes down any such inventory to its net realizable value in the period in which the impairment is identified. These adjustments are based upon multiple factors, including inventory levels at the company and at its specialty distributors, projected demand and product shelf life. These impairment charges, if required, are recorded as a cost of revenue. As of December 31, 2018, estimates of excess inventory were immaterial. Property and Equipment, Net Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are recognized using the straight-line method over the estimated useful lives of the respective assets, which is generally three to five years. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful economic lives of the related assets. Restricted Cash At December 31, 2018 the Company had $699,000 in restricted cash deposits with a bank, of which $500,000 is serving as security for our field force corporate credit card program. $159,000 is collateral for a letter of credit issued to the landlord of the Company’s leased facility. If the Company defaults on its rental obligations, $159,000 will be payable to the landlord. In addition, the Company has $40,000 in restricted cash to secure the Company’s corporate purchasing credit card issued through the same bank. Intangible Assets The Company maintains definite-lived intangible assets related to certain capitalized milestone payments to Harvard University (Harvard). These assets are amortized over their remaining useful lives, which are estimated based on the shorter of the remaining patent life or the estimated useful life of the underlying product. Intangible assets are amortized using the economic consumption method if anticipated future revenues can be reasonably estimated. The straight-line method is used when future revenues cannot be reasonably estimated. The Company assesses its intangible assets for impairment if indicators are present or changes in circumstance suggest that impairment may exist. Events that could result in an impairment, or trigger an interim impairment assessment, include the receipt of additional clinical or nonclinical data regarding one of the Company’s drug candidates or a potentially competitive drug candidate, changes in the clinical development program for a drug candidate, or new information regarding potential sales for the drug. If impairment indicators are present or changes in circumstance suggest that impairment may exist, the Company performs a recoverability test by comparing the sum of the estimated undiscounted cash flows of each intangible asset to its carrying value on the consolidated balance sheet. If the undiscounted cash flows used in the recoverability test are less than the carrying value, the Company would determine the fair value of the intangible asset and recognize an impairment loss if the carrying value of the intangible asset exceeds its fair value. The Company capitalized milestone payments of $4.75 million related to regulatory approval of Xerava in the US and EU, which will be amortized over their estimated useful lives of approximately 12 years. Amortization expense for each of the following five years is expected to be $0.4 million. Revenue Recognition Product Revenue Revenue recognition under ASC 606 is applied through a five-step model as follows: (1) identify the contract(s) with the customer; (2) identify performance obligations in the contract; (3) determine the transaction price; (4) allocate transaction price to the performance obligation; and (5) recognize revenue when (or as) each performance obligation is satisfied. The Company’s arrangements with its distributors are determined to be contracts within the scope of ASC 606 when all five criteria in ASC 606 are met. These five criteria were assessed at the inception of each arrangement. Since the criteria were met during this initial assessment, the Company will not reassess the criteria unless there is an indication of a significant change in facts and circumstances. In order to meet the definition of a contract, it must also be probable that the Company will collect the consideration to which it is entitled for goods or services to be transferred. Once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services to be delivered with each contract, determines whether those are performance obligations and the related transaction price. The Company then recognizes revenue based on 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 Xerava, which the Company began selling to customers in October 2018. The Company sells Xerava to specialty distributors. These customers resell Xerava to hospitals or other treatment centers. In addition to these distributor agreements and the related discounts and allowances, the Company is subject to government mandated rebates, chargebacks, and discounts with respect to the purchase of the Company’s product. Product revenue is recognized net of reserves for all variable consideration, including discounts, chargebacks, government rebates and product returns. Reserves for Variable Consideration The Company evaluates its contracts with customers for forms of variable consideration which may require an adjustment to the transaction price based on their estimated impact. Revenues from product sales are recorded at the gross sales price, net of variable consideration, as described above. The Company estimates variable consideration using the expected value method, which is the sum of probability-weighted amounts in a range of possible outcomes. These outcomes include market events and trends, forecasted product demand patterns, customer buying patterns and statutory requirements. The resulting reserves represent the Company’s best estimates of variable consideration it expects to occur. Before it can include an amount of variable consideration in the transaction price, the Company must consider whether the amount of variable consideration is constrained. The Company includes estimates of variable consideration in revenue only when it has a “high degree of confidence” that revenue will not be reversed in a subsequent reporting period. To include variable consideration in the estimated transaction price, the entity has to conclude that it is “probable” that a significant revenue reversal will not occur in future periods, considering both the likelihood and magnitude of a revenue reversal to apply the constraint. Based on the above, the Company applies the constraint to variable consideration included in its contracts if it cannot conclude that it is probable that a significant revenue reversal will not occur in future periods. Trade Discounts and Allowances: The Company offers its customers prompt pay discounts and service fees as stated in its customer contracts. The Company pays these service fees to its customers in exchange for their performance of various product distribution, marketing and promotional services targeted at advancing end-user sales of the Company’s product. The related reserves are set in the same period the corresponding revenue is recognized, resulting in a reduction of product revenue. Government Chargebacks and Rebates: Under the terms of the Company’s master agreements, customers may charge back the Company for reimbursement when they are contractually obligated to sell products to government entities or other end-users at a lower price than the wholesale acquisition cost, or WAC, at which those products were acquired from the Company. These rebates consist of Medicare, TriCare and Medicaid rebates as well as those related to other government drug pricing and reimbursement programs. Product Returns: Products are eligible for return by the Customers in various scenarios under the Company’s returns policies included as part of its master distribution agreements. Return options are provided for expired merchandise, short-dated merchandise, products damaged in transit, or any discontinued, withdrawn, or recalled products. The Company estimates the amount of product that may be returned and records this as a reduction in revenue in the relevant period. The Company currently estimates product return liabilities using available industry data, sales information and visibility into the inventory remaining in the distribution channel. The Company has not received any returns to date since launch. The Company will continue to assess its estimates of the various components of variable consideration as it accumulates additional historical data and make adjustments to these estimates and allowances accordingly. Collaboration Revenue The Company has entered into an out-licensing agreement that is evaluated under Accounting Standards Codification, Topic 606 (“Topic 606”), Revenue from Contracts with Customers To determine the amount and timing of revenue to be recognized under each agreement, the Company evaluates the following criteria: (i) confirming the goods or services in the contract; (ii) defining the performance obligations under the agreement; (iii) determining the transaction price, including any constraint on variable consideration; (iv) allocating the transaction price to the performance obligations; and (v) defining how the revenue will be recognized for each performance obligation. In determining the accounting treatment for these arrangements, the Company develops assumptions to determine the stand-alone selling price for each performance obligation in the contract. These assumptions may include forecasted revenues, development timelines, discount rates and probabilities of technical and regulatory success. Licenses of Intellectual Property: If the license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenue from upfront fees allocated to the license when the license, including any associated know-how, is transferred to the licensee and the licensee can use and benefit from the license. For licenses that are bundled with other obligations, the Company uses judgment to evaluate the combined performance obligation to determine whether it is satisfied over time or at a point in time and the appropriate method of measuring completion for purposes of recognizing revenue. Milestone Payments: For arrangements that include development milestone payments, the Company evaluates whether the milestones are considered probable and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the Company’s control or the licensee’s control, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. Manufacturing Supply : Arrangements that include a promise for future supply of drug substance or drug product for either clinical development or commercial supply at the licensee’s discretion are generally considered as options. The Company assesses if these options provide a material right to the licensee and if so, they are accounted for as separate performance obligations. If the Company is entitled to additional payments when the licensee exercises these options, the Company recognizes revenue when the licensee obtains control of the goods, which is upon delivery. Royalties: For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). Government Contract Revenue The Company’s government contract revenue has been derived from its subcontracts with CUBRC under the BARDA Contract, and the NIAID Contract, its subaward under the NIAID Grant and its cost reimbursement Sub-Award Agreement with the Trustees of Boston University, the administrator of the CARB-X program (Note 3). The Company recognizes revenue under these best-efforts, cost-reimbursable and cost-plus-fixed-fee subcontracts and subaward as the Company performs services under the subcontracts and subaward so long as a subcontract and subaward has been executed and the fees for these services are fixed or determinable, legally billable and reasonably assured of collection. Recognized amounts reflect the Company’s partial performance under the subcontracts and subaward and equal direct and indirect costs incurred plus fixed fees, where applicable. The Company does not recognize revenue under these arrangements for amounts related to contract periods where funding is not yet committed as amounts above committed funding thresholds would not be considered fixed or determinable or reasonably assured of collection. Revenues and expenses under these arrangements are presented gross on the consolidated statements of operations and comprehensive loss as the Company has determined it is the primary obligor under these arrangements relative to the research and development services it performs as lead technical expert. Revenue under the Company’s subcontracts under both the NIAID Contract and the BARDA Contract and under the CARB-X Award are earned under a cost-plus-fixed-fee arrangement in which the Company is reimbursed for direct costs incurred plus allowable indirect costs and a fixed-fee earned. Billings under these arrangements are based on approved provisional indirect billing rates, which permit recovery of allowable fringe benefits, allowable overhead and general and administrative expenses and a fixed fee. Revenue under the Company’s subaward under the NIAID Grant was earned under a cost-reimbursable arrangement in which the Company was reimbursed for direct costs incurred plus allowable indirect costs. Billings under the NIAID Grant are based on approved provisional indirect billing rates, which permit recovery of fringe benefits and allowable general and administrative expenses. Cost of Revenue Cost of revenue consists primarily of the manufacturing and distribution costs for Xerava, Xerava net sales-based royalties and the amortization of the intangible asset associated with certain milestones paid to Harvard related to Xerava. All manufacturing costs incurred prior to Xerava’s approval in the United States on August 27, 2018 have been expensed in research and development and are not included in cost of revenue. Research and Development Expenses Research and development costs are charged to expense as incurred and include, but are not limited to:
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personnel-related expenses, including salaries, benefits, and stock-based compensation expense;
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expenses incurred under agreements with contract research organizations, contract manufacturing organizations and consultants that provide preclinical, clinical, regulatory and manufacturing services;
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certain payments made under the Company’s license agreement with Harvard University;
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the cost of acquiring, developing and manufacturing clinical trial materials and lab supplies;
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facility, depreciation and other expenses, which include direct and allocated expenses for rent, maintenance of the Company’s facilities, insurance and other supplies; and
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costs associated with preclinical and regulatory. Costs for certain development activities, such as clinical trials, are recognized based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical site activations, or information provided to the Company by its vendors on their actual costs incurred. Payments for these activities are based on the terms of the individual arrangements, which may differ from the pattern of costs incurred, and are reflected in the financial statements as prepaid or accrued research and development. In certain circumstances, the Company is required to make nonrefundable advance payments to vendors for goods or services that will be received in the future for use in research and development activities. In such circumstances, the nonrefundable advance payments are deferred and capitalized, even when there is no alternative future use for the research and development, until related goods or services are provided. Comprehensive Loss Comprehensive loss consists of net income or loss and changes in equity during a period from transactions and other events and circumstances generated from non-owner sources. The Company’s net loss equals comprehensive loss for all periods presented. Income Taxes The Company uses the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and the tax reporting basis of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. The Company provides a valuation allowance against net deferred tax assets unless, based upon the available evidence, it is more likely than not that the deferred tax assets will be realized. The Company has evaluated available evidence and concluded that the Company may not realize the benefit of its deferred tax assets; therefore a valuation allowance has been established for the full amount of the deferred tax assets. The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Tax Cuts and Jobs Act (“the Act”) was enacted on December 22, 2017. The Act reduces the US federal corporate tax rate from 34% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. On December 22, 2017, the Securities and Exchange Commission issued guidance under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) directing taxpayers to consider the impact of the U.S. legislation as “provisional” when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the change in tax law. At December 31, 2018, the accounting for the tax effects of enactment of the Act was completed and did not recognize any material adjustments from the provisional amounts that were recorded. Stock-Based Compensation The Company determines stock-based compensation at the grant date using the Black-Scholes option pricing model to estimate fair value for employee equity awards. The Company recognizes the value of the award as an expense on a straight-line basis over the requisite service period using the estimated fair market value of the stock and accounts for forfeitures as they occur. For employee awards with performance conditions, the Company assesses whether the condition is probable of achievement, in which case, the fair value of the award is recognized over the requisite service period. The Company records stock-based compensation expense for payments issued to non-employees based on the fair value of the awards using the Black-Scholes option pricing model. Stock-based compensation payments issued to non-employees are revalued at each reporting period and as the equity instruments vest and are recognized as expense using the accelerated attribution method over the related service period. Going Concern Assessment Accounting Standards Update (“ASU”) No. 2014-15, Presentation of Financial Statements - Going Concern, Based on a detailed cash forecast incorporating Xerava commercialization activities, selective development of its pipeline candidates and related spending plans, the Company expects its cash to last more than one year beyond the date that the financial statements were issued. Management’s belief with respect to its ability to fund operations is based on estimates that are subject to risks and uncertainties. If actual results are different from management’s estimates, the Company may need to seek additional funding sooner than anticipated. Based on this analysis, no additional disclosures were required. Recently Adopted Accounting Pronouncements In November 2016, the Financial Accounting Standard Board (FASB) issued Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers In addition to its evaluation of its product and collaboration revenue under Topic 606 as discussed above, the Company has concluded that its government grants are not within the scope of Topic 606, as they do not meet the definition of a contract with a “customer”. The Company has concluded that the grants meet the definition of a contribution and are non-reciprocal transactions. The Company has further concluded that Subtopic 958-605, Not-for-Profit-Entities-Revenue Recognition In the absence of applicable guidance under GAAP as of January 1, 2018 for the grants, the Company has developed a policy for the recognition of revenue for the grants as follows:
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Revenue is recognized when the right to payment is realized or is realizable
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Revenues are realized when services are exchanged for cash or claims to cash. Revenues are not recognized until earned.
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The Company’s revenue-earning activities involve rendering services that constitute its ongoing major or central operations, and revenues are considered to have been earned when the Company has substantially accomplished what it must do to be entitled to the benefits represented by the revenues. The Company believes this policy is consistent with the overarching premise in Topic 606, to ensure that it recognizes revenues to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services, even though there is no “exchange” as defined in the ASC. The Company believes the recognition of revenue as costs are incurred and amounts become earned/realizable is analogous to the concept of transfer of control of a service over time under ASC 606. Prior to January 1, 2018, the Company recognized revenue as it performed services under the grants so long as an agreement had been executed and the fees for these services were fixed or determinable, legally billable and reasonably assured of collection. Recognized amounts reflected the Company’s partial performance under the grants and equal direct and indirect costs incurred plus fixed fees, where applicable. Revenues and expenses under these arrangements were presented gross. Revenue recognition under this new policy is not materially different than would have been calculated under the old guidance. As a result of the adoption of this policy, there was no change to the amounts the Company has historically recorded to its financial statements. There have been no other significant changes to the Company’s significant accounting policies since the beginning of this fiscal year. Recent Accounting Pronouncements Not Yet Adopted In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) Codification Improvements to Topic 842, Leases Leases (Topic 842): Targeted Improvements The Company intends to adopt the standard at the effective date of January 1, 2019 by applying the new lease requirements beginning on the effective date without restating prior periods. Upon adoption, the Company plans to elect the package of practical expedients permitted under the transition guidance which, among other things, allows the Company to carry forward historical classification of its existing leases. While the Company is continuing to evaluate the impact of adopting the standard and its related amendments, the of material Subsequent Events The Company has considered all events occurring subsequent to December 31, 2018 and has concluded that all significant events have been disclosed in the financial statements and accompanying notes. Net Loss per Common Share Basic net loss per share is calculated by dividing the net loss by the weighted average number of shares of Common Stock outstanding for the period, without consideration for common stock equivalents. Diluted net loss per share is computed by dividing the net loss by the weighted average number of common share equivalents outstanding for the period determined using the treasury-stock method. For purposes of this calculation, warrants, stock options, and restricted stock units 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. The amounts in the table below were excluded from the calculation of diluted weighted-average shares outstanding, prior to the use of the treasury stoc |
